Tools & Resources Loan Agreement for Small Business Clients (JSC MFO Crystal)

Loan Agreement for Small Business Clients (JSC MFO Crystal)

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JSC Microfinance Organization Crystal, Georgia shared its plain language loan contract with The Smart Campaign.  This contract is used with clients seeking small businesses credit. The contract is succinct, written in plain language, and uses very little jargon.

JSC Microfinance Organization Crystal, Georgia

Introduction
As noted in Principle 2, Transparent and Responsible Pricing, financial institutions must transparently and adequately disclose the pricing, terms, and conditions of financial products (including interest charges, insurance premiums, all fees, etc.). Transparent pricing is a pre-condition for responsible pricing.

Transparency includes clear communication with clients at every service point—from promotion of a product, to signing a loan contract, to closing an account.  One service point that is particularly important is the signing of the loan contract. Clients can become confused by the legal and financial jargon often used in loan contracts. To adequately protect clients, institutions must deliberately design and use plain language loan contracts that meet the following criteria:

  • The contract offers a clear description of terms, conditions, interest rate, and fees.
  • It includes an amortization schedule that separates principal, interest, and fees, and defines the amount, number, and due dates of installment payments.
  • It uses clear and simple language that will not confuse or mislead the customer.
  • It does not use fine print or legal jargon that is not commonly understood.
  • It is appropriate to the financial literacy of the intended user.


This Tool
JSC Microfinance Organization Crystal, Georgia shared its plain language loan contract with The Smart Campaign.  This contract is used with clients seeking small businesses credit. The contract is succinct, written in plain language, and uses very little jargon. It details loan terms, fees, and penalties, and importantly, spells out the rights and responsibilities of both parties. Clause 5.10, “The Lender takes responsibility to provide Borrower with full and clear information on the loan…including all potential fees and changes…” is particularly important for transparency.

The contract includes an amortization schedule that separates principal, interest, and fees, and defines the amount, number, and due dates of installment payments. Finally, the contract states that the client shall receive a copy of the signed document, an important factor in ensuring transparency with the client.

The Smart Campaign encourages institutions to download and review this document, and to use it as a “good practice” example for creating or improving their own loan contracts. This PDF document includes annotations that highlight several of the most important aspects of the loan contract. Simply click on the yellow note boxes to reveal the notes.
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