The truth of the matter is, you need to fully understand a loan agreement before you sign on the dotted line. In this article, we are going to take the fear out of these types of contracts and give you a breakdown of what to look for in a loan agreement that works for you.
So What is a Loan Agreement?
A loan agreement is a type of contract that protects two parties involved in a standard loan transaction that is mainly between a lender and a borrower.
A loan agreement creates a strong understanding between the stipulations, laws, and other mechanics of the loan. If the agreement in the document is broken, it can result in fines or a termination of the loan.
A loan can be binding for an extended period, so you need to make sure that you look for certain things in the loan to protect yourself if things don’t go in your favor.
Look at the Interest Rate Details
You want to make sure you know you know if the interest rate is fixed or variable. Here’s the difference between the two:
Variable Interest Rate
A variable interest rate loan is a loan where the interest you pay can change based on the fluctuation of the market’s interest rates.
This can be an advantage because if the market’s interest rates go down, so will your payment.
Fixed Interest Rate
A fixed-rate interest loan is where the interest rate stays the same for the duration of the loan. This can be an advantage if the trends in the interest rate market are increasing, so it would be best to lock in your rate at the time.
But, If there’s a trend that interest rates are declining, it’s best to skip on the fixed-rate and go with a variable rate instead.
What is the APR?
The APR or annual percentage rate is the combined interest paid and all other fees associated—broker fees, closing costs, and discount points—during the duration of the loan.
Some may not know what the difference is between the interest rate and APR, so here is a better way to think about it. The interest rate is an excellent way to gauge what you will be paying every month on your loan.
The APR is the way to gauge how much you will be paying besides the principal amount for the entire loan.
Is Collateral Required?
When you get a secured loan, this means it’s protected with collateral on your end, which could be your house, car, and other assets you may possess.
In the event you default on your loan, the lender may go after your assets to recoup from their losses.
You also want to look out for specific clauses on how a lender can regain their losses. They may be able to take as much as 75% of your wages if there is a clause in the loan, so make sure you have a full understanding in the event you default.
Know exactly what their process is and what they can take from you if you can’t pay up.
You might find the word amortization in your agreement. Amortization is the schedule of payments where you solely pay the interest, or the principal and possibly a combination of both in for your monthly payment
When the loan eventually matures, an increase in the portion of each payment towards the principal takes place while the portion of the interest decreases.
You need to know what this schedule is because this can directly affect your credit rating because the debt owed can change later than what you had thought.
Are There Any Prepayment Penalties?
You want to see if there are any prepayment penalties in your loan agreement. Believe it or not, a lender can assess a fee if you pay the loan off early. When you pay a loan off early, you pay less over time of the loan. The big business for lenders is collecting interest.
This is why a lender can charge a prepayment fee if the loan is paid off early. It’s a way for the lender to offset what they lost in interest from the borrower paying off the loan at an earlier time.
The Bottom Line For Loan Agreements
Loans are great for purchasing or investing in items such as your business, homes, vehicles or just acquiring equity in general. You want to make sure you don’t find yourself in a bind because you didn’t read the fine print of the loan.
Remember, these are just a few items that you need to look for when understanding a loan agreement
Every loan agreement should be gone over with a professional contract service that can help you understand every line, clauses, terms, and conditions of your loan
If you need help figuring out your loan agreement or coming up with one, we are here to help. The last thing we want to see is people getting caught in a bind because they didn’t read the fine print. Protect yourself and make sure that you have common knowledge of your loan agreement before you sign on the dotted line.
Feel free to contact us with any questions about your contract needs.