All about the Loan Agreement

INHALTSVERZEICHNIS

In the following article we will discuss the legal transaction of granting a loan. In this context, we provide information on the specific components of a loan agreement and, in particular, the means by which a loan can be secured.

1. Loan Agreement: What is it?

The loan agreement is concluded by the borrower and the lender. In the process, the lender lends the borrower ownership of fungible items. The fungible items are usually money. The borrower is obliged to repay the loan amount – usually with accrued interest – within a certain period of time.

2. What does a Loan Agreement look like?

2.1. Loan Agreement: Content

2.1.1. Interest on Loans

In principle, loans are associated with interest. Interest is the annual price of the loan and is calculated on the basis of the outstanding amount of the loan. In practice, many interest rates are fixed, meaning that the interest rate remains the same throughout the loan agreement. The interest rate is the percentage rate used to calculate the amount of interest.

However, the loan agreement may also provide for a variable interest rate. In this case, the interest rate is linked to a reference index and fluctuates accordingly (so-called indexed interest rate). For loans in CHF, the “SARON” (Swiss Average Rate Overnight) is usually used as the reference interest rate. This represents the overnight rate of the secured money market for Swiss francs (CHF).The variable interest rate is calculated over a contractually agreed period (for example 360 days). If an indexed interest rate is agreed, the interest rate consists of two elements: the prime rate or reference index on the one hand, which is periodically adjusted, and the lender’s (usually fixed) margin in relation to the prime rate.

If a variable interest rate is agreed, three elements must therefore be determined:

  • The reference rate or index used (for example, the "SARON").
  • The lender's fixed agreed margin, i.e. the percentage added to the prime rate to determine the effective interest rate
  • The period for which the reference interest rate is calculated (interest period)

Finally, an interest-free loan can also be agreed.

2.1.2. Purpose of the Loan

The loan agreement may stipulate that the loan sum may only be used for a specific purpose. For example, the notional sum of CHF 100,000 would only be allowed to be used for the investment in new machinery for the production of screws. If the borrower uses the loan for other purposes, for example for new office equipment or new company cars, there would be a violation of contract. Accordingly, the borrower could demand immediate repayment of the loan amount including accrued interest.

2.1.3. Default by the Borrower

Provisions relating to default are also relevant. If the borrower defaults on the payment of any amount under the loan agreement, the borrower shall pay default interest on the outstanding loan amount and any accrued interest. The statutory interest rate is 5%, but a different rate may be agreed. Furthermore, it can be agreed that in such a case the lender can demand immediate repayment of the loan amount including all accrued interest.

2.1.4. Repayment of the Loan

The contract also contains provisions on the repayment of the loan amount granted. On the one hand, the loan agreement may stipulate that this sum is to be repaid all at once at the end of the term of the loan agreement. On the other hand, the parties may also stipulate that the loan amount will be repaid in installments. The frequency of the installments can be specifically determined by the parties, e.g. at the end of each month or in 3 installments on April 1, August 1 and December 1.

It can also be agreed that the borrower can repay parts of the loan early. It may be useful to specify a minimum amount.

2.2. Loan Agreement with Security

Securities serve to protect the lender. In practice, it is assets or the guarantee of a third party (surety) that the lender accepts as security for the loan. If the borrower unable to fulfill his obligation under the loan agreement, the lender can use the security to cover its loss. The provision of security may be regulated either in the loan agreement itself or in a separate agreement. In case of regulation in a separate contract, it would become a part of the loan contract. In the case of a loan agreement with security, the loan amount is generally transferred to the borrower only after the legally valid provision of the security.

2.2.1. Surety

In the case of a surety, a third party is liable for the repayment of the loan in addition to the borrower. If the borrower becomes insolvent and is therefore unable to meet his interest payment and/or repayment obligation, this can be claimed from the guarantor. The guarantor can be either a legal entity (company) or a private person. If the guarantor is a private person, the simple guarantee generally requires public certification. However, this can be waived if the guarantee does not exceed the amount of CHF 2,000 and the guarantor himself enters the amount up to which he is liable in writing in the contract and signs the contract.

The guarantee ends with the repayment of the loan. Depending on the agreement, the simple guarantee may also end in time before the full repayment of the loan.

2.2.2. Assignment of Claims

In the case of an agreement of the assignement of claims, the borrower assigns claims it has from its debtors to the lender. It is customary for all existing and future claims to be assigned. However, the loan agreement may also provide that only certain claims are to be assigned.

It must be further clarified whether the borrower is liable either only for the existence of the claims or, in addition, also for the correct payment by the debtor of the claim. Another important point, both from a commercial and a legal point of view, is the information to be given to the “assigned” debtors: Is the lender allowed to inform them immediately about the assignment or only from the time when he intends to make use of the guarantee?

The claims will be returned to the borrower after the expiration of the loan agreement and the fulfillment of all obligations contained therein.

2.2.3. Security Transfer Agreement

Under the security transfer agreement, the borrower transfers ownership of certain assets to the lender, but possession remains with the borrower. Here, it may be relevant that the borrower insures the items assigned as security against customary risks. Since this security modality may disadvantage the borrower’s other creditors in the event of bankruptcy, the parties must have a good reason for its use. This is the case, for example, if the borrower is to continue using the items assigned as security as part of its business operations. 

2.2.4. Pledge Agreement

In a pledge agreement, the borrower pledges certain assets and transfers possession to the lender. Possible assets include securities (e.g. a share certificate) or objects (e.g. a painting). If the borrower is unable to fulfill his obligation under the loan agreement due to insolvency, the lender has the right to hold himself harmless with the proceeds of the pledged asset (so-called right of liquidation).

If the pledged asset is a security, it should also be clarified who and how exercises the associated rights and obligations. In practice, as long as the pledgor is solvent, he remains the holder of the rights and obligations.

Possession shall be transferred back to the borrower upon expiration of the loan agreement and fulfillment of all obligations contained therein.

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3. Termination of a Loan Agreement

3.1. Repayment of the Loan Agreement

If a fixed term of the loan agreement has been concluded, it shall end upon expiry of the agreed term. Upon expiry of the agreed term, all obligations under the loan agreement shall also become due, namely the full repayment of the loan amount including accrued interest.

3.2. Termination of a Loan Agreement

It is possible that no specific term is agreed for the loan agreement. A loan agreement for an indefinite period ends with ordinary notice of termination. The notice period can be freely agreed, for example 30 days or 6 months.

Further, there may also be a composition of the two modalities. In this case, a fixed minimum term would be agreed, after which the loan agreement would continue for an indefinite period. After expiry of the minimum term, the agreement can in turn be terminated by ordinary notice of termination in compliance with the notice period.

The full repayment of the loan amount, including accrued interest, is also due upon expiry of the notice period.

3.3. Default or Bankruptcy of the Borrower

It may happen that the borrower becomes bankrupt or otherwise insolvent. The borrower’s default or bankruptcy does not mean termination of the loan agreement in the strict sense. In such a case, however, the lender may demand immediate repayment of the loan amount, including all accrued interest. In this sense, the opening of bankruptcy proceedings causes the immediate maturity of claims.

4. Templates for the Loan

4.1. Loan: Templates in English

4.1.1. Loan Agreement: Templates in English

Loan Agreement

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4.1.2. Securing of a Loan: Templates in English

Agreement for a Simple Surety

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Agreement for the Assignment of Claims

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Security Transfer Agreement

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Pledge Agreement

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4.2. Loan: Templates in German

4.2.1. Loan Agreement: Template in German

Darlehensvertrag

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4.2.2. Securing of a Loan: Templates in German

Vertrag betreffend einfache Bürgschaft

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Vertrag betreffend die Abtretung von Forderungen

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Sicherungsübereignungsvertrag

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Pfandvertrag

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Tobias Güntenspenger - Sales Manager bei Approovd - Schweizer Vertragsmanagement Software

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