THE LOAN AGREEMENT When you take a loan, you're committing yourself not
only to repay, but to repay on a specific schedule. Those details are spelled
out in the loan agreement, or loan note, a detailed document the
lender provides. When you sign it, you've agreed to its terms and conditions.
The fine print may be off-putting, but you should read it carefully. It
explains exactly what you're getting and getting into.
Some lenders have rewritten their loan agreements in recent years to make
them more easily understandable. And the loan officer you work with should
be willing to answer your questions before you sign. You should never hesitate
to ask for clear explanations.
HOW MUCH CAN YOU BORROW?
Usually you request a specific loan amount. The lender can approve it, reject it, or offer you a smaller amount. Sometimes you need to apply to more than one lender to find one who will approve your request. You may have to pay an application fee each time.
The amount financed, or the principal,
is what you borrow. However, you may not actually get the entire amount
that is approved. That's because the lender will usually subtract any application
fees, credit-check fees, or other costs of the loan before writing you a
check or crediting money to your account. In addition, the lender may require
you to use part of the loan amount to pay off another loan or urge you to
purchase insurance to cover the loan if you should die before repaying the
full balance due.
HOW MUCH WILL IT COST?
The cost of a loan is determined by the annual
percentage rate (APR) that the lender offers, and the length of
time you take to repay. However, you may be able to find a loan at a better
rate if you investigate what various lenders are charging before you apply.
Sometimes lenders are eager to lend, and offer lower rates or waive the fees. While you probably can't time your need to borrow to coincide with those occasions, some borrowers apply for home equity lines of credit when lenders promote those loans at a reduced upfront cost. Then the money is available if it's needed, but there's no charge unless the line is used.
You may also be able to get a preferred customer rate, or a small discount on the interest rate, if you maintain a savings or investment account with the lender.
WHEN DO YOU HAVE TO REPAY?
The terms of repayment are part of your loan agreement. In most cases, you pay interest and some of the principal on a regular schedule, usually once a month.
In some cases, including some college loans, you may pay only interest for a specific period and then begin to repay the principal. In others, you pay only interest for the term of the loan and then repay the entire principal in a lump sum. Most lenders allow you to prepay a loan at any time. Some charge a prepayment penalty, usually about 2% of the amount borrowed, although many states prohibit this practice.
WHAT IF YOU DON'T PAY ON TIME?
In many cases, you may have to pay a late fee if your payment arrives after the payment due date, and you should expect
to be penalized if you send a payment check that bounces, or is returned
unpaid by your bank because you don't have enough in your account to cover
the check. Failing to live up to the agreement is called defaulting on the loan. The lender may have the right to repossess, or take
back, and sell the property you put up as security.
Lenders may also impose a stiff penalty if you default. And, if they hire
a collection agency or lawyer, you'll have to pay for those services, too.
Another way lenders can collect if you default is by setting off,
or taking the amount you owe from any checking or savings account you have
with the lender.