A credit agreement is a legally binding contract made between a person who borrows money and the lender. It is agreed upon by both parties and outlines the terms of repayment, the fees, other costs and all the rules and requirements pertaining to the loan.
When a bank arranges to lend money to a customer for any reason, the lender and borrower agree to specific terms. These terms include the dollar amount of the loan, how much time the borrower has to repay the money, the payment amount required on the debt, and the interest rate and other costs charged for the loan. This is the credit agreement. It spells out all the details of the loan.
The credit agreement is often required before the borrower can use the funds from the lender. These terms usually are agreed upon at the start. The borrower must read and sign the terms of the offer, thereby agreeing to them.
Credit agreement example
Jamie takes out an auto loan for $25,000 with her bank. She agrees to a 60-month loan term at an interest rate of 3.75 percent. The credit agreement details that she must pay $449 on the 15th of every month for the next five years. The agreement says that Jamie will pay $1,953 in interest over the life of her loan. The agreement also lists all the other fees pertaining to the loan, as well as the consequences of a breach of contract on the part of the borrower.
Jamie reads the credit agreement thoroughly and learns everything she needs to know about the loan. Jamie and the lender agree to all the terms outlined in the agreement. At the signing of the agreement, it becomes legally binding.
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