Abdul Muhammed Law Practice
Abdul Muhammed Law Practice breaks down the typical terms, conditions, and covenants associated with bank loans in Nigeria. Let’s delve into each of the 11 elements.
Interest rates
Interest is the cost of borrowing money. In a bank loan, the interest rate is the percentage charged on the amount you borrow.
It’s how the bank earns money from lending to you.
Interest rates can be fixed (stays the same throughout the loan term) or variable (can change based on market conditions).
Generally, a lower interest rate is more favorable, as it means you’ll pay less over time.
Repayment schedule
The repayment schedule outlines how you’ll pay back the loan.
It includes details like the monthly or periodic payments you need to make, the total number of payments, and the overall duration of the loan.
A longer repayment period usually means smaller monthly payments but more interest paid overall.
A shorter period means larger payments but less interest.
Principal and interest payments
Each loan payment consists of two parts: principal and interest.
The principal is the original amount you borrowed, and the interest is the cost of borrowing.
Initially, a larger portion of your payment goes towards paying interest, while over time, more goes towards reducing the principal.
Collateral
Collateral is something valuable that you offer to the bank as security for the loan.
If you can’t repay the loan, the bank can take ownership of the collateral to recover its losses.
Common types of collateral include real estate, vehicles, or other valuable assets.
Loan term
The loan term is the duration for which you’re borrowing the money.
It’s the time you have to repay the loan. Short-term loans have lower interest but higher monthly payments, while long-term loans have smaller monthly payments but more interest paid in total.
Prepayment penalties
Some loans have penalties if you pay off the loan early.
This is because banks earn interest over time, and if you repay the loan before the agreed term, they might charge a fee to compensate for the interest they’re missing out on.
Default and remedies
Default occurs when you fail to meet the terms of the loan, such as missing payments.
The remedies section explains what actions the bank can take if you default.
This could include declaring the entire loan amount due immediately, pursuing legal action, or seizing collateral.
Restrictive covenants
Restrictive covenants are conditions that you must follow during the loan term.
They’re meant to protect the bank’s interests and ensure you’re financially stable enough to repay.
These can include requirements to maintain a certain level of insurance, restrictions on taking on additional debt, or maintaining specific financial ratios.
Guarantees
In some cases, especially for business loans, a personal or corporate guarantee might be required.
This means that individuals or other companies agree to be responsible for the loan if the primary borrower can’t repay.
Events of default
This section outlines specific situations that would be considered a default, allowing the bank to take action.
Examples could include missing payments, violating covenants, having a winding-up petition presented against the debtor or declaring bankruptcy.
Governing law and jurisdiction
This specifies the laws that will apply to the loan agreement and the jurisdiction where any legal disputes will be resolved. It’s often where the bank is located.
Conclusion
Remember, these terms governing bank loans in Nigeria can vary based on the type of loan, the lender’s policies, and the borrower’s creditworthiness.
It’s crucial to thoroughly understand all terms before agreeing to a loan and, when in doubt, seek legal advice.
READ: How do banks assess creditworthiness?
Dealing with excessive debt claims by your bank?
