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What Is a Loan Instrument?

By Kenneth W. Michael Wills
Updated May 17, 2024
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Lenders will issue a loan instrument in the event that a borrower requests a loan and the lender agrees to extend the loan. Documentation of the loan agreement is essential to establishing the legal obligations of both parties to the lending and borrowing process. As such, a loan instrument refers to the actual document that records the loan agreement in its entirety. Common with financial institutions, the term also applies to various other entities — or even individuals — loaning equipment or other assets for use. Covering all aspects of the agreement between the lender and borrower, the loan instrument will detail the distribution and redistribution of all associated assets over a specified period of time.

Issuing a loan, whether financial or another asset, usually stipulates a set of conditions in which the lender offers an asset or sum on money with conditions for repayment, payment of, and/or usage to which the borrower must adhere. The loan instrument will include all the details articulated in the form of an agreement of which both parties will sign. For a financial loan, usually there is an agreement on repayment, most often in installments spread out over a period of time. Assets on a loan will usually spell-out conditions of usage and an arrangement of payment for such usage, whether upfront or incorporating predetermined intervals of payment over an extended period.

Differing from a promissory note, the loan agreement that encompasses a loan instrument seeks to document all details and specifics related to the loan. Therefore, both parties sign to acknowledge not only agreement, but understanding, thus making it a binding legal document. Promissory notes, on the other hand, only secure the signature of a borrower, who acknowledges both understanding and agreement by signing such a document. Still, both types of documents form an acknowledgment that allows the lender to pursue damages legally in the event of non-payment or mishandling of loaned assets.

Bank loan instrument is another common term falling under this usage, but it typically refers to a financial institution issuing financial loans. Often referring to either a loan of credit or a demand note, the term still refers to the loan agreement between the borrower and lender, but specifically a bank as the lending entity. Instrument is a term that specifically denotes a formally executed document that constitutes a legal agreement between two or more parties, thus making it a legal instrument. Most all forms of documents associated with borrowing and lending essentially constitute what is termed a loan instrument, despite the variation in terms used.

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