Loan Agreement Basics: 5 Essential Tips

Before securing funds from a lending institution, you will have to conclude an agreement or contract specifying all the specifics of such operation. This document must be studied meticulously in order for all details to be crystal clear. Here are five essential aspects to be aware of. 

1.General terms and conditions

The document will specify the term — i.e., the period over which the amount will be gradually repaid. Typically, this is between 12 and 48 months, although it always depends on the institution and the borrower’s individual situation. 

The monthly repayments are to be done by a certain date, which is also included in the formal document. The method must be determined as well. Sometimes, the predetermined sum will be auto-withdrawn from your account on a certain date, which means you only have to ensure there is enough money for the transaction to succeed. 

2. How much does it cost?

Borrowing is not a free service, and its price is referred to as interest. Under the contract, you are obliged to repay the principal amount (the sum lent to you) plus interest (basically, what the lender gains from helping you — hence the name). 

Interest is often specified as the annual percentage rate or APR. The longer it takes you to return the money — the more it eventually costs you. For example, for $10,000 paid back over 12 months with APR of 25%, the total interest will be $2,500 unless the debt is fully covered sooner. 

To see how much interest is accumulated over a month, divide the APR by 12. The same logic applies to weeks (divide by 52) and days (divide by 365). 

3. Prepayment terms

In the best-case scenario, the client decides to fulfill his obligations (whether in full or partially) before the due date. Given the logic of interest rate mechanics, this reduces the cost of borrowing and thus is a very favorable outcome. However, some lenders may charge special fees in these cases. Any such charges must be made clear before the document is signed. 

4. Additional fees

Aside from the interest, the source may impose extra fees on the client (e.g., processing fees or fees for early repayment). The amounts of such extra payments must be spelled out clearly, so there are no surprises for the client later on. 

5. Non-fulfillment of obligations

Even if you are sure of your ability to cover the debt, there may always be emergency complications. Being even a day late may result in a penalty. Falling behind on monthly repayments typically brings mounting penalties, and later more drastic measures depending on the nature of lending. Some personal loans require collateral, which means that a borrower’s property, such as a vehicle or house, serves as a guarantee. If they fail to meet their obligations, the lender receives the right to confiscate and sell it with the goal of covering the losses. 

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