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Checking the Fine Print in Your Personal Loan Contract
Let’s face it, few people like to read the fine print on a loan contract – or any contract, for that matter.
Those with deep pockets can hire a lawyer to do their legal bird-dogging, but for Main Street Americans, it’s either review a personal loan contract or risk losing leverage from a contract that may be stacked with often-evasive, vague, and confusing fine print.
In fact, a report from NextAdvisor states that 54% of Americans are confused by credit card contracts and are “perplexed” about what they’re reading.
Personal loan contracts may be equally vexing, and it’s up to borrowers to take a magnifying glass to their loan contracts.
“There are several key items that would be beneficial to read in a personal loan contract,” says Jeff Grobaski, chief executive officer at Epic River, a financial services software company. “There can be cost saving options in the loan details such as statement fees that can be avoided if you sign up for email or SMS payment reminders. Some loans also include a discount to the interest rate if the borrower signs up for autopay.”
Equally important is knowing the risks of not reviewing a personal loan’s fine print.
“Not understanding all of the parameters of a loan can result in significant problems before payoff,” Grobaski says. “Interest changes and uneven payment terms like balloon payments, deferred interest, re- amortizations, variable interest rates and prepayment penalties all are critical for a borrower to understand.”
Reviewing Your Personal Loan Terms
What should personal loan consumers focus on when reviewing a loan contract’s fine print? Basically, the loan features that could cost you money and go from there.
Start with money matters. “Focus on all the interest calculations and payment terms, but also late payment and default parameters,” Grobaski adds. “A personal loan agreement can include details on how and when a loan can be reported to credit bureaus, if there is any guarantors, as well as any pre-approved lender actions in the event of default (like a repossession of property, lien on real estate or investments, for example.”)
Avoid prepayment penalties. You might end up in a situation where you’d like to pay off your loan quickly – but there could be a catch.
“If you’ve signed a contract with prepayment penalties, paying off a loan earlier can be complicated and result in added costs,” says Nishank Khanna, chief financial officer at Clarify Capital in New York City.“Try to avoid agreeing to prepayment penalties so that you have flexible payment options down the road.”
Check for collateral language: Borrowers should take caution whenever there’s mention of collateral. “The last thing you want to do is take out a loan and blindly agree to put up your house, or retirement fund, as security,” Khanna says.
Look for loan origination fees: Eyeball any mention of origination fees to ensure you’re not paying more than you want- or need to. “Research market industry standards so you have a framework to work from,” Khanna adds.
Are the items you agreed to verbally in the contract or not? “It’s too easy to forget or not completely understand what has been discussed in a phone conversation, so there is a risk of signing an agreement you do not want to or where you can’t meet the loan terms,” says Joseph Toms, president and CEO of Freedom Financial Asset Management in San Mateo, Cal.
“A potential borrower could miss or misunderstand the interest rate, the loan origination fee, late fees, whether there is a grace period, and the exact number of months for payoff, due dates each month. Also, check to see if there are fees for unsuccessful payments, for personal check processing, prepayment, or if there are any other miscellaneous fees.”
Getting Professional Help
Is reviewing a personal loan contract with a fine-tooth comb a do-it-yourself project? It can be, under the right circumstances.
“If you feel comfortable with loan terminology, you might be okay to go ahead and review the loan contract yourself,” Toms says. “That said, the safest bet is to go over the contract with a qualified professional, like a lawyer or financial manager, who can offer their expertise and help you make an informed decision about financing.”
“Leveraging the expertise of a qualified professional is a sure way to navigate the sneaky language and confusing legal jargon typically found within loan contracts,” he adds.
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Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.