A credit agreement is a legally binding contract between borrower and lender, outlining the terms of the loan or credit agreement in place.
A credit agreement will be provided to the borrower as part of their credit application, and agreements can vary from creditor to creditor, so it’s important to check these and, from the lender’s perspective, ensure that they meet your business requirements and for a creditor that they outline the rights and responsibilities of the borrower.
This is especially important as everyone must know what happens when an invoice overdue situation happens, whether additional interest is added on, debt collection services are carried out, etc.
In this post, we look at examples of credit agreements and how they work for both the borrower and the lender.
Credit agreement definition
A credit agreement outlines the loan terms between the borrower and the lender. It is a way of obtaining money by gaining credit.
The credit agreement outlines the details of the deal and both the lender’s and the borrower’s rights during the term of the agreement.
Credit agreements can include:
- Credit sale agreements
- Hire purchase agreements
- Conditional sale agreements.
With the credit agreement, lenders must include full disclosure of the terms of the loan; this can include:
- Annual interest rate and fees
- How interest is applied to outstanding balances
- Fees associated with the account
- Duration and terms of the loan
- Payment terms
- Borrowing and repayment procedures
- Liabilities and obligations of both parties
- Consequences of late payment and outstanding invoices.
How credit agreement works
Once both parties sign the agreement, a binding legal contract will form.
However, borrowers can negotiate on some credit agreements and renegotiate if needed.
For example, you will be able to renegotiate your mortgage rate and interest charges, and if you’re struggling with payments, you can potentially renegotiate your monthly repayments.
Examples of credit agreements:
Revolving credit – these are for loans that have no fixed end date. For example, with credit cards, the borrower can take money/credit from the card repeatedly, so long as monthly repayments prescribed by the lender are adhered to.
Non-revolving loans – a mortgage is an example of this type of credit. In these instances, there is a fixed term date and a set repayment schedule. Non-revolving loans include a more detailed credit agreement and tend to be for much larger sums of money. As there is more risk to the lender with this form of credit, borrowers will typically be asked to agree to some form of collateral, which will be spelt out in the credit agreement.
How a credit agreement works for the borrower
Before signing a credit agreement, you must understand what type of agreement you’re getting into. What the interest rate charges are. The final amount you will have to pay back. When payments are due. Your right to cancel (if you do choose to cancel your agreement, you will need to return the goods; if it is a service, a charge will potentially be built into your agreement). Regarding the conditions involving early repayments, the lender must receive this in written format, to which you will then be provided with an early settlement amount.
You may also receive a statutory rebate for any interest charges you’ve made.
If you fall behind on payments and invoices become overdue, the lender can issue you an arrears notice and an FCA information sheet. Most lenders will look to support you to manage repayments in the best way possible for both parties.
For example, repayments can change if the borrower submits a request to the lender for relief in the face of unaffordable payments.
In these instances, the lender may reduce monthly repayments or suspend them for a set amount of time. If they are reduced, this can be made into a permanent change in the credit agreement, which will need to be signed by both parties to make it official and legally binding.
However, a lender can also take action if a borrower defaults on repayments. These will be outlined in the credit agreement, but they can include chase letters, outstanding invoices being passed to professional debt collection teams for collection, and more.
It’s important to understand that defaulting on repayments can appear on your credit file history and affect your credit score.
Note: The Consumer Credit Act oversees some credit agreements but will not cover gas, electricity, or water meter agreements.
It’s essential to always read the credit agreement before borrowing any funds.
Direct Route
At Direct Route, our team of debt collection professionals offers a range of debt recovery solutions for commercial debts and overdue invoices.
Working with complete transparency, efficiency, and professionalism, people choose to work alongside us due to our high success rates and our level of customer service.
We work hard to ensure businesses can maintain their business-client relationships, and often, working with a third party like ourselves is the best way to achieve this.
If you need assistance recovering overdue invoices and commercial debt, speak to our team today and see how we can help.
Call +447860 197476 or email memberbenefits@directroute.co.uk
You might be interested to read this article: Invoicing Tips for Cleaning Businesses.