In order to read a loan document correctly, you need to know what is contains and how it is structured. While going through the document, look out for the promissory note. This section mentions the amount of principal and interest, due dates for payment and the conditions under which the bank can declare you a defaulter.
Apart from non-payment of the loan there may be several other reasons that may be considered cause for default. Being aware of these in advance will help you keep your credit record clean and protect your personal assets. Keep a look out for a provision known as cure. This enables you to get 10 days or so to fix the default in case your check gets lost in the mail or if you default unintentionally. Take note of the “bank’s rights and remedies” portion of the promissory note. This will give you details about what the bank can do should it declare a default.
For instance, the term acceleration refers to the remedy where the bank can decide to collect the full amount of the loan all at once. In case your payment terms are accelerated, the bank can recover the loan from the collateral that you have used to secure the loan.
The Confession of Judgment clause is something you should watch out for. It enables a bank to declare a default, accelerate the payment terms and file a case in the local court and star collecting the unpaid amount – all in one day!
Since most businesses that are starting up, have very few assets of their own, lenders often ask the owners of the business to secure the payment with their personal assets. This is known as a personal guarantee. It means if your business fails to take off, you will pay back the loan using your personal possessions.
You may be able to negotiate with the lender for a limited duration for the guarantee if you have been able to make timely payments. If you find a bank is unwilling to negotiate its terms, approach another lender who is more flexible. If a lender has approved a loan, you can take the same terms and talk to another bank to see if they can offer you better conditions. While taking out a loan, it is most important to pay attention to the fine print and shop around before you finally settle on the bank that want to build a relationship with.
