A credit agreement is a legally binding contract documenting the terms of a loan agreement. The credit agreement outlines all of the terms associated with the loan.
Breaking Down Credit Agreements
A credit agreement is created for both retail and institutional lending. It outlines the details of the loan and all of its terms. This includes situations with excess cash flow.
Retail Customer Agreements
Retail customer credit agreements will vary by the type of credit being issued to the customer. Customers can apply for credit cards, personal loans, mortgage loans, and revolving credit accounts. Each type of credit product has its own industry credit agreement standards. In many cases, the terms of a credit agreement for a retail lending product will be provided to the borrower in their credit application. Therefore, the credit application can also serve as the credit agreement.
Lenders provide full disclosure of all of the loan’s terms in a credit agreement. Important lending terms included in the credit agreement include the annual interest rate, how the interest is applied to outstanding balances, any fees associated with the account, the duration of the loan, the payment terms and any consequences for late payments.
Revolving credit accounts typically have a more simplified application and credit agreement process than non-revolving loans. Non-revolving loans such as personal loans and mortgage loans often require a more extensive credit application. These types of loans typically have a more formal credit agreement process requiring the credit agreement to be signed and agreed upon by both the lender and the customer in the final phase of the transaction process with the contract coming into effect only after both parties have signed it.
Institutional Credit Agreements
Institutional credit deals include similar types of lending products with both revolving and non-revolving credit options. They may also include the issuance of bonds or a loan syndicate which includes multiple lenders investing in a structured lending product. Therefore, institutional credit agreements are much more complicated than retail agreements.
Institutional credit agreements typically involve a lead underwriter who negotiates all of the terms of the lending deal. Deal terms will include the interest rate, payment terms, length of credit, and any penalties for late payments. Underwriters also facilitate the involvement of multiple parties on the loan as well as any structured tranches which may individually have their own terms.
Institutional credit agreements must be agreed to and signed by all parties involved. In many cases, these credit agreements must also be filed with and approved by the Securities and Exchange Commission.