9 Things to Check in Personal Loan Contract Before Signing
Before contracting a personal loan, or any banking product especially credit products such as (car loan, business loan, credit card, etc.), it is vital to read the credit contract i.e. terms and conditions carefully to make sure that the conditions are the ones you want to contract and committing.
Remember that by signing the contract, you are legally and officially giving the consent that all the clauses are read and agreed. For this reason, it is vital that, if you are going to contract a consumer loan or personal loan, you should carefully read following 9 important points.
What to know about a credit contract?
In a personal loan contract, whether bought online or in-person, there are some data points that will be of vital importance to review and ensure that you agree with the clauses and avoid unpleasant surprises.
(1) Amount and term: This is the amount of money borrower takes in the form of credit and the term during which all the repayment has to be done along with the interest rate and any other charges. These two numbers must align with the amount and the term that you are interested in.
(2) Type of interest rate: It will be the cost of the credit and must be reflected whether it is fixed during the whole life of the credit or it will vary during the loan tenure.
(3) Annual percentage rate: The APR is the total cost of the financing, including the interest rate and any other extra charges and should also be reflected in the contract. Borrower must negotiate this with the lender to the maximum possible extent possible.
(4) Other charges: If borrowers are charged with any additional fees then it must be mentioned in the contract document in sync with the borrowed amount. And if there is no commission charged then this must appear too.
(5) Bonds and their cost: If the loan requires contracting any linked product, it must be specified what it is, the tenure and its cost. It should also specify, if there are penalties for early cancellation or if buying of the product benefits borrowers by lowering the interest rate. In addition, it is also important to read the contract of each linked product.
(6) Early repayment charges: Many lenders, charge a fee for early repayment and cancelling the loan. So borrowers must be aware of it.
(7) Monthly payment: This number indicates how much borrower will pay each month to the lender and the day on which the fee will be charged. This helps borrowers in maintaining sufficient balance in his/her account so that they do not miss on EMI payment and avoid hefty delayed payment penalties.
(8) Amortization table: It is a payment schedule document in which the balance of a loan and the dates or number of installments to be paid are shown in detail. It usually consists of the following
- Period: The time at which the payment must be made
- Interest: Indicates the interest that the borrower pays to the lender in each period. It is calculated by multiplying the agreed interest rate by the outstanding principal. The interest can be fixed or variable.
- Amortization of the principal: It consists of the repayment of the loan, excluding interest. This is the amount that is deducted during each period from the outstanding principal.
- Installment: Value to be paid in each month or period of time. It is the sum of interest and amortization.
- Final balance: This is the total amount of the loan that remains to be repaid, which gets reduced after each repayment/period until it reaches 0.
Note that the elements of an amortization table vary according to the type of amortization or line of credit. In some cases you will find fields such as life insurance, fire and earthquake insurance, commissions, etc.
(9) Total to pay: This is very important, since it allows borrowers to know how much he/she will pay in total including interest and the commissions. There are many comparison sites which the borrower should explore in order to get the best deal.
It is important to bear in mind that all the data that appear in the contract will be the ones borrowers will be contracting. So any improvement that we negotiate with the entity must be mentioned in the contract to be valid.