The loan contract is an important type of agreement, especially in financial transactions, because it clearly defines the rights and obligations of the parties involved. The drafting of a loan contract not only requires accuracy in content but also must comply with legal regulations. Below are Things To Note When Drafting The Loan Contract in accordance with current laws.
What is a loan contract?
The property loan contract is specified in Article 463 of the Civil Code 2015 as follows: “The property loan contract is an agreement between the parties, whereby the lender assigns the property to the borrower; when due, the borrower must return such property in accordance with the agreement.”. This contract involves the lender delivering property to the borrower, who must return it properly and sufficiently when it is due.
The necessary contents in the loan contract
Things To Note When Drafting The Loan Contract must ensure the following basic contents:
Information of the Parties
Clearly specify the personal details of both the lender and the borrower, which may include their name, address, ID card number, or tax identification number.
Types of Loan Assets
Provide a precise description of the loan assets, including the quantity, value, and unit of measurement if the asset is an item.
Interest rates and terms
The interest rate for lending must comply with Article 468 of the Civil Code 2015, not exceeding 20% per year.
The repayment term needs to be dated and can be renegotiated if there is a change in the borrower’s financial situation.
Payment Methods
Payment methods (cash, bank transfer) need to be agreed upon in advance and specified in the loan contract.
Security Measures
The parties can agree on the application of security measures to protect the interests of the lender.
Things To Note When Drafting The Loan Contract
This section will delve into Things To Note When Drafting The Loan Contract, in order to ensure legality and avoid unnecessary disputes.
Compliance with interest rate regulations and accurate calculations
One of the most important factors when drafting a loan contract is the regulation of interest rates. The interest rate must not exceed 20% per year as prescribed by law. If the parties agree on an interest rate that exceeds this level, the excess will not be legally effective.
In addition, interest calculations must be transparent. The contract should clearly state whether the interest rate is fixed or floating (which may change over time), how interest is calculated (monthly, quarterly, or annually), and the relevant formula, to avoid future disputes.
Repayment period and contract extension
The contract must clearly specify the repayment period, including the start and end dates. If the borrower is unable to repay on time due to financial difficulties, an extension clause must be included. This clause should address:
- What is the maximum grace period.
- Conditions for renewal.
- Interest rates apply during the extension period.
Without such a clause, the lender may demand full payment when due.
Clauses on security measures for debt repayment obligations
The inclusion of security measures is crucial when drafting a loan contract, particularly for large or high-value loans. Pursuant to Article 292 of the Civil Code 2015, security measures include pledges, mortgages, guarantees, escrows, or deposits.
The contract must specify the type of security provided and the details of the secured property. For example, if the collateral is real estate, the contract must detail the house’s certificate of ownership, area, and address.
Regulations on rights and obligations of the parties
In the loan contract, the parties need to clearly define their rights and obligations. The lender has the right to require the borrower to pay on time, but it is also necessary to ensure the delivery of the borrowed assets in accordance with the agreement. In contrast, the borrower is obliged to repay the property and interest rate in accordance with the contract.
This clarity avoids disputes regarding delayed payments or insufficient interest, allowing the lender to seek legal remedies if the borrower fails to fulfil their obligations.
Dispute resolution provisions
Dispute resolution clauses are an integral part of Things To Note When Drafting The Loan Contract. The contract should clearly state the method of handling disputes such as mediation, negotiation or initiating a lawsuit in court or commercial arbitration. If the parties agree in advance on the dispute resolution method, this will help minimize the time and costs associated with initiating a lawsuit.
Notarisation of loan contracts
Vietnamese law does not mandate notarisation for loan agreements. However, for substantial loans, notarisation enhances the legal validity of the agreement and safeguards the rights of the parties involved. This is particularly beneficial in the event of disputes that require resolution through competent authorities.
Notarisation ensures that the contract is clear, transparent, and difficult to contest. Without notarisation, disputes may lead to lengthy verification processes, complicating debt recovery.
Disbursement and Repayment Methods
The loan agreement must clearly specify the method and timing of disbursement to ensure both parties understand their rights and responsibilities. If the loan is disbursed in a lump sum, the specific date for the transfer should be indicated. In cases of multiple disbursements, the agreement should stipulate the conditions under which the borrower will receive each tranche, typically based on project progress or the fulfilment of certain predetermined conditions.
Repayment methods are another crucial aspect that requires precise regulation. The borrower may be required to make periodic payments or to repay the entire loan amount at maturity. This includes stipulating the amount of principal and interest, repayment schedules, the method of interest calculation (fixed or floating), and the form of payment (bank transfer, cash, etc.). For flexible loans, conditions allowing for early repayment or adjustments to the repayment schedule should be defined. These regulations protect the interests of both parties and help minimise potential disputes during the contract’s execution.
Tax and Associated Fees Regulations
In addition to primary factors such as interest rates and loan terms, the agreement must outline the responsibilities for paying taxes and fees arising from the loan. For loans accruing interest, the lender may be liable for personal income tax on this income, and the contract should clearly designate which party is responsible for tax obligations. For financial institutions, value-added tax (VAT) may apply to services related to the loan.
Associated fees include charges such as the notary fees for executing the contract, legal service fees, or disbursement fees. The parties should agree explicitly on who will bear these costs to avoid conflicts. Should the borrower wish to repay the loan early, the agreement must also specify any applicable early repayment fees, if any, to ensure that the borrower is financially prepared. Such stipulations help clarify each party’s financial obligations, facilitate the contract’s execution, and mitigate the risk of unforeseen costs.
Things To Note When Drafting The Loan Contract include compliance with legal regulations on interest rates, repayment periods, and security measures. In order to minimize risks and ensure the interests of both parties, the contract should be drafted carefully, clearly and, If necessary, it can be notarized to increase legality. Understanding and properly applying the legal provisions in the loan contract not only helps to avoid risks but also ensures transparency and fairness for the parties involved in the transaction.
The above is an overview of Things To Note When Drafting The Loan Contract. If you have difficulties in finding a Law Firm to advise and support in the relevant legal field, please contact us. Phuoc & Partners is a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms in Vietnam with highly specialised teams in top legal fields such as Labour and Employment, Taxation, Merger and Acquisition, Litigation. We are confident in providing customers with optimal and effective service.
