Simple Legal Checklist Before You Sign a Loan

When someone takes out a loan – whether personally or for their business – it represents a big commitment (more than just obtaining money). Putting your signature on that loan agreement means you have read and accepted all the terms and conditions of the loan agreement (including any consequences for defaulting and how the lender will be paid back). Even if someone misses certain sections of the loan agreement due to its length, their signature indicates acceptance of all terms and conditions.

Consider this checklist a guide so that things are honest, the amount you want to borrow is right, and that you’re squared away for the long term.

 

Quick Legal Look (Before You Even Think About the Loan)

Before you even glance at the loan papers, check that the whole thing is real. This fast check makes sure the deal is legal from the get-go.

Is the Lender for Real?

First off, see if the lender is even allowed to lend money.

Check if they’re:

• A real bank that the Reserve Bank of India controls.
• A Non-Banking Financial Company (NBFC) with permission from the RBI.
• A housing or co-operative bank that can lend money.
• A website that just connects you to lenders.

Make sure the lender follows the rules:

• RBI guidelines​
• Fair Practices Code
• Online lending rules (if that’s how you’re getting the loan)

That they’re allowed to offer this kind of loan.

Why it matters:

Taking loans from lenders without rules can mean crazy high interest, weird ways of getting money back, and no help if things get bad.

​Can You Even Borrow?

Check if you’re legally able to get the loan.

If you’re borrowing, ask yourself:

• You have to be an adult.
• No law should stop you from borrowing.
• If someone is signing for you, make sure they have the right papers.

If you’re borrowing for a business:

• The company needs to agree to the loan.
• Partnerships need to follow their partnership rules.
• LLPs need to have a partner sign off.
• Trusts need to follow their trust rules.

Why this matters:

If you don’t have the right permission, the loan could be invalid, causing problems within your company or giving the lender a reason to come after the person who signed without permission.

​What’s the Loan For? Make Sure It’s Legal

The loan agreement will say what you’re using the money for, and that matters.

Make sure:

• The reason you’re giving is correct and legal.
• You’re not going to use the money for anything illegal.

You’re following the rules for:

• Money from other countries
• Money laundering laws
• Taxe

What could happen:

If you use the loan for something other than what you said, the lender can take the loan back and sue you.

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Loan Details: Are They Fair?

This part is about making sure the loan is clear, fair, and predictable.

How Much and When Do You Get It?

Check:

• The total amount of the loan.
• If you’re getting all the money at once or in pieces.

What you need to do before getting the money:

• Give them documents
• Offer something as security.
• Pay fees upfront
• Get insurance

Also, check:

• When interest starts.
• If you have to pay extra for money you don’t use.

Why it matters:

If the loan agreement isn’t clear about when you get the money, you could argue about how much interest you owe.

 

Interest Rate: The Most Important Thing Pay close attention to the interest rate.

Make sure you know:

• If the rate is fixed, variable, or a mix of both.
• What the rate is based on (like the repo rate).
• How much extra are they charging on top of that?
• How often does the rate change?​

What to watch out for:

• Clauses that let them change the rate without telling you.
• Not being clear about how the rate changes.
• Not telling you the highest possible interest you could pay.

The Legal Point:

Interest rates have to be fair, clear, and follow RBI rules.

Penalties and Late Fees

Look closely at the penalty fees.

Make sure you know:

• How much are the penalties?
• What triggers them?
• If they charge interest on the penalties.
• If everyone gets charged the same way.

The Rules:

Late fees shouldn’t be a money-maker for lenders; they should just stop you from missing payments.

​All the Fees: What You’re Paying For?

Be sure you know all the costs.

Are they telling you about:

• Application and processing costs?
• Legal, paperwork, and appraisal costs?
• Inspection costs?
• Insurance costs?
• Prepayment penalties?
• Late payment fees?

Your Protection:

You can argue about any fee they don’t tell you about in court.

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Paying Back the Loan: Can You Handle It?

How Much Are Your Payments?​

You should:

• Know how much your payments are and how often you have to pay.
• Know the total amount you have to pay back.
• Look at the payment schedule carefully.

Pay attention to:

• If you’re paying mostly interest at the beginning.
• Huge payments at the end.
• Payments that go up or down.​

The Risk:

If you don’t understand how your payments work, you could end up paying a lot more than you thought.

Can You Pay It Off Early?

You need to know:

• If there’s a period where you can’t pay early.
• If there are penalties for paying early.
• If they treat different loans or borrowers differently.

Your Protection:

Rules that make it too hard to pay early might be considered unfair.

How Are You Paying?

Usually, you’ll pay through:

• Automatic transfers.
• Standing instructions.
• Checks.

Be Careful:

Paying with checks means you could get into legal trouble if the check bounces.

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What If You Can’t Pay? What’s Security​

This applies if you’re offering something as security for the loan.

What Are You Offering?

You need to know:

• What kind of asset are you using as security?
• If you really own it.
• If anyone else has a claim on it.

Why it matters:

If the security documents are messed up, it makes it harder for the lender to collect and increases the risk of a lawsuit.

How Is It Valued?

You should know:

• Who is doing the appraisal?
• How often do they update the value?
• What happens if the value changes?

The Risk:

If the value of your security goes down, they might ask you to pay more or demand the money back faster.

​Is It Registered?

Make sure they’re following the rules for:

• Registering the security with the government (for companies).
• Registering the mortgage for the property.
• Registering the security for other assets.

What could happen:

If the security isn’t registered, it might not be valid.

​Who Is Guaranteeing the Loan?

Guarantee clauses need to be clear.

The borrower and guarantor need to know:

• If the guarantee is limited or unlimited.
• If the guarantee continues over time.
• If the guarantor is giving up any rights.

The Reality:

Guarantors are usually treated the same as the borrower in court.

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Promises and Rules

What Are You Promising?

These are legally binding statements about things like:

• Your finances.
• Following the law.
• Owning your assets.
• Not having any disputes.

The Risk:

Even a small mistake can be considered a default.

What Do You Have to Do?

You might have to:

• Make payments on time.
• Keep insurance up to date.
• Provide financial statements.
• Confirm you’re following the rules.

What Can’t You Do?

You might be restricted from:

• Taking out more loans.
• Selling or transferring assets.
• Changing your company structure.
• Changing who owns or controls the company.

Your Concern:

Too many restrictions can make it hard to run your business.

What Happens If You Mess Up

What Counts as a Default?​

Defaults can happen if you:

• Missed payments.
• Break the rules.
• Default on other agreements.
• Have serious financial problems.

Red Flag:

If the lender gets to decide what counts as a default, they have too much power.

What Can the Lender Do?

They can:

• Demand the loan back.​
• Take your security.
• Go after the guarantors.
• Sue you.

They have to follow the law.

Can You Fix It?

You should know:

• If you have a chance to fix the problem.
• How long do you have to fix it?
• What it takes to get the lender to waive the default.

Your Protection:

Cure periods reduce unnecessary lawsuits.

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How Will They Get the Money Back?

How Will They Collect?

Review:

• If they can use the SARFAESI Act.
• How they’ll use collection agencies.
• If you’ll go to court or arbitration.

They have to follow the rules.

​What Law Applies?

Confirm:

• What law applies?
• Which courts have jurisdiction?
• The location is convenient and neutral.

What About Arbitration?

Examine:

• Where the arbitration will be held.
• How the arbitrator will be chosen.
• Who pays the costs?

 

What About Insurance?

​Do You Need Insurance?

Verify:

• What kind of insurance do you need?​
• If it’s enough.
• Who chooses the insurer?
• How much is the premium?

​Who Gets the Insurance Money?

Make sure:

• The lender only gets what you owe them.
• You get the rest.

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What About Your Data?

What About Sharing Your Data?

Review:

• How they’ll use your data.
• If they’ll share it with others.
• If they’ll report to credit bureaus.

Is It Confidential?

Make sure:

• Both sides keep things confidential.
• There are limited exceptions.

 

Can They Transfer the Loan?

Can the Lender Transfer the Loan?

Check:

• If they can transfer the loan without your permission.
• If they have to tell you.

How Can the Agreement Be Changed?

Make sure:

• Changes have to be in writing.
• They can’t make big changes without your agreement.

How Can It End?

Review:

• Your rights to end it early.
• How much notice do you have to give?
• What are the financial consequences are

​Is Everything Signed Correctly?

​Is the Stamp Duty Paid?

Make sure:

• The correct amount is paid.
• You’re following state laws.

​Are the Signatures Correct?

Confirm:

• The right people signed.
• There were proper witnesses.
• The details are accurate.

Are All the Pages There?

Verify:

• All schedules are attached.
• Nothing is missing.

 

Final Check

Before you sign:

• All blanks are filled.
• There are no unauthorized changes.
• You get a copy.
• They explained your rights.

 

Conclusion

A loan is a big commitment. Checking everything carefully before you sign protects you and reduces the risk of problems later on.

Doing your homework before borrowing is an investment in your future.