How to Read and Understand the Terms of Your Loan Agreement

Written by

You have just been approved for a loan, and you couldn’t feel more excited and relieved at the same time. However, before you sign on the dotted line, it’s important that you ask yourself one question.

“Do I know what all is in this loan agreement?”

The reality is that not all loan agreements are equal. After all, not all lenders have the same standards when it comes to lending funds to consumers.

For this reason, it is essential that you have a firm grasp of every component of your loan agreement. 

Here’s a rundown on how to read and comprehend your loan terms.

Let’s get started!

Interest Rate in Your Loan Agreement

The interest rate in your loan agreement will depend on a number of factors, including the kind of loan you’re receiving. Yes, that’s right! Whether your loan is unsecured or secured is as important for a lender in deciding the rate of interest of your loan like your credit score.  

There are certainly other points to consider when you apply for a personal loan like will your interest be floating or fixed. Note that your loan agreement should spell out this information also.

If your loan has a fixed rate, your interest rate will remain the same during the entire period that you’re repaying the loan. Meanwhile, if your loan has a variable rate, the interest rate can change with time. The latter type of rate is usually used only for complex loans, like a home mortgage with an adjustable-rate.

Prepayment Procedure

It is important that your loan agreement spell out whether there is a penalty for paying off your loan early or not. Repaying your loan early can help you save money on interest costs. Not only that, prepayment makes your loan term more flexible. 

Not all lenders charge a prepayment penalty, a fine that you pay on paying off your loan before the end of your loan term. So, double-check to see if your loan agreement mentions about early repayment. If not, check with the loan company before signing the agreement. You should try to pay off your loan as rapidly as you can if there is no prepayment penalties, as this will save you in interest in the long run.

Mandatory Arbitration

This is yet another important component of your loan agreement to pay attention to. That’s because this provision is becoming increasingly popular.

With mandatory arbitration, you are required to resolve any dispute you have with the lender via an arbitrator. This is because using an arbitrator is a lot less expensive than using the civil court system.

The benefit of arbitration is that an experienced legal expert will be the one deciding your dispute, versus courtroom jurors who likely know little about the law.

Note that in some legal agreement situations, arbitration is binding, meaning that you can’t appeal the arbitrator’s decision. If this is the case for you agreement, make sure that you are comfortable with this before signing the agreement. 

Dealing with Defaults

In contrast to prepayment, if your loan is a fixed-term loan, your loan agreement will have an ‘events of default’ clause. This mainly tells whether the borrower is in default or not. 

Non-payment of interest or the principal amount, insolvency or breach of any clause under the loan agreement can mean that the borrower is in default and will have to go through the subsequent issues that can emerge. 

How Can You Help Yourself

There are many types of loans available like title loans, registration loans, or instalment loans. You choose the right loan based on your financial situation and needs. But when at the same time you should also know the terms of your loan. 

Loans are to make your life simpler when you are in need of funds. So read each and every aspect of your loan agreement carefully before you sign.

Article Categories:
Loan