Loan Agreement - What You Need to Know

Loan Agreement - What You Need to Know

The vast majority of the population in Georgia has a loan agreement signed with banks, microfinance organizations, etc. Accordingly, it is one of the most widespread contracts in Georgia. In most cases, a party signs a loan agreement without knowing its details and does not even consider it necessary to read it. The present article cannot fully cover all the nuances of a loan agreement and/or a whole range of related issues, but it highlights the most important ones.

The loan agreement is a "real" contract – In the legal sense, based on the loan agreement, until one party transfers the loan amount to the other party, the loan agreement is not considered to have entered into force; instead, it is considered that a preliminary loan agreement has been signed;

Strong and weak parties to the loan agreement – The legally strong party in a loan agreement is the bank, while the weak party is the individual. This dynamic imposes more obligations on the bank than on the individual;

The term of the loan agreement – Any loan agreement has two types of terms: it is either fixed-term or termless. In the case of a fixed term, this means that the obligation must be fulfilled within a specific period of time.

Loan agreement schedule – The schedule of the loan agreement dictates on which specific days and dates the obligation must be fulfilled.

Loan agreement commission fee – There is no legal definition for the term "commission" in the legal sphere. The bank specifies the commission in the loan agreement, which leads to the following situation (based on practical experience): you want to get a loan of 10,000 GEL, but, for example, a microfinance organization deducts 4% upon issuance. Consequently, 400 GEL goes to the commission fee, meaning you do not actually receive 10,000 GEL, but rather 9,600 GEL. However, you pay the loan and its interest not on the 9,600 GEL you received, but on the full 10,000 GEL, which contradicts the main concept of the loan agreement as a "real" contract;

Loan interest – This is simply the fee for the duration a person uses someone else's money. The effective interest rate reflects exactly this: although the bank deducts the commission, the person still pays for it (paying interest on the 10,000 GEL rather than the actually transferred 9,600 GEL). As for the amount of interest, although it is set by a private bank, it is supervised by the National Bank of Georgia;

Loan penalty (liquidated damages) – This represents a means of securing the loan. The purpose of this legislative provision is not to necessarily enforce the penalty in action; on the contrary, it is a preventive measure to ensure the person does not breach the contract. It is noteworthy that the penalty must not be disproportionately high. What is considered disproportionately high depends on the duration of the delay, the amount, the financial history of the violator, etc;

Termination of the loan agreement – A loan agreement is terminated either by its fulfillment or by the cancellation of the contract by one of the parties. In most cases, this is done by the bank. In the case of a bank, there is an established rule that it must notify the borrower about the cancellation, but in practice, little attention is paid to this;

Loan indebtedness – This is the issue that usually attracts the most attention, because in court disputes, the bank mostly brings a one-page so-called "debt certificate" containing only a final number. However, this certificate does not include the basis for the origin of the debt, the calculation period, the exact amount calculated, the number of days the penalty applies to, the number of days the interest is calculated for, etc. This causes major misunderstandings because the court demands opposing evidence from the party disputing this debt certificate, which unfairly shifts the burden of proof (between the legally strong and weak parties);

Disproportionately high interest rate – In practice, there are cases when a loan is issued at an amount higher than the established legal interest rate. Although every loan agreement is individual, it must necessarily be reasonably close to what is called the average interest rate established by the National Bank;

Invalidity of the loan agreement – This is the most complex issue, because it is rare for someone to force another person to take out a loan. However, a dispute is permissible regarding the amount of interest, the basis of its issuance, and the penalty. Georgian judicial practice knows cases when the invalidity of the interest was achieved not through a primary lawsuit, but through a statement of defense (an objection/counterclaim);

The loan agreement is widely used, but it is not yet properly regulated, especially where strong and weak parties are involved. In the absence of strict legislative boundaries, in most cases, clauses can be found in the loan agreement that are a priori invalid; however, the strong party still includes them in the agreement to create a fear factor for the legally uninformed party. The most important advice when signing a loan agreement is to consult a lawyer so that you are fully informed about the risks.