Do You Understand The Fine Print Of Your Loan Agreement?

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Published on July 18th, 2019

A bank loan can be a vehicle to financial success or delayed failure. Do you know that that smiling bank loan officer is only mandated to act in the best interests of his employer? It is only in very few exceptional circumstances that a lender is under any obligation to give you life-saving financial information. In many cases, they are within the law when they offer you financial products that could cripple you financially.

When you are applying for a loan, keep in mind that information and research is your best aide. Additionally, know that your lender is out to make a profit, from you. That lending officer has every incentive to sell the most profitable product for the bank. In her article, Barbara Reynolds speaks about the housing implosion and its effects on women of color.

For decades, this group had played by the rules, saved and invested in their homes. They had observed financial discipline keeping their FICO scores above 700. Unfortunately, in their advanced age, the subprime housing crash took away their life work and savings. Some banks had for decades preyed on their families with high-cost loans and fees. Wells Fargo was for instance forced to settle $175 million over such federal accusations.

1. Read The Agreement To Predatory Lenders

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You could just as easily fall victim to predatory lending in today’s fast lending environment. Most of the times, all you need to do is click “I agree,” and the cash is yours. If you do not go through your lender’s documents, you will find yourself in a financial fix.

That document is jam-packed with requirements and details. It is information hidden in plain sight because banks will not conceal the terms of a credit agreement. However, most borrowers tend to rush over the details or skip to the very last page.

If you were not aware, you are allowed to question your lender over details in the agreement. If there are technical aspects that your mind cannot grasp, seek an attorney’s help. So, what features and documents in your loan agreement should you keenly go through?

2. The Interest Rates

The rate will either be variable or fixed. Variable interest lending implies that you will pay the market’s interest rate. Your repayments are therefore bound to vary if they are blended with your interest and principal. The 2.5% plus Wall Street Journal Prime Rate is a standard variable charge applied in business lending.

Fixed rates, on the other hand, imply that your borrowing charges remain constant for the duration of the contract.

Your payments will not be affected by the market’s conditions. The fees will also be consistent over the term of the agreement.

A fixed-rate type of advance, therefore, is best taken out when the lending environment is good. If the rate is affordable from the onset, it will be more profitable to you. If the interest rates are low and are about to rise, you should lock in the amount borrowed to a fixed rate.

A variable-rate may be more profitable to you since it accrues fewer charges than a fixed rate. Nevertheless, it is also a risky option when it comes to long amortization loan periods. A fixed-rate in this aspect can shield you from changes in the market rate.

If available, go for interest-only lending since the payments are lower. Watch out however for predatory lenders, who will lead you to pay off the interest leaving your principal sum intact.

3. The Annual Percentage Yield

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The APR is a compilation of your lender’s yearly charges. It combines fees and interest charges to help you to compare and evaluate lenders with one quick figure. Keep in mind that the APR will not factor in the compound interest.

You should, consequently, look for the APY for a more accurate payment picture. The APY lies in jargon category, so most lenders hardly quote it.

It is also higher than the APR so it might not feature on the credit agreement. If you want to know your APY, you can ask your lender or use an online calculator.

4. Credit Rating

If you are borrowing funds for your business, your approval will be based by your credit score, and your company’s as well. If yours is a startup, your personal FICO rating health will be critical for better interest charges.

You might not be aware of this, but your partner’s credit history will affect the lending process. This is especially so for any equity holding business partner. If your rating is subprime, you will find lenders willing to advance you the funds. Nevertheless, the charges are highly impacted by the high costs of fees and interest apportioned to high-risk lending.

Be wary of lenders who take advantage of less than stellar scores to give unjustified risk-based lending prices. This is especially so if you are not aware of your credit rating. Check about the lenders with a reputable credit matching service Borrower can take help here( ), About Lender’s APR, TOS & other Loan Terms ) before applying for funds, to ensure that you get a fair deal.

5. Unsecured And Secured Loans

If your terms indicate the funds require collateral, it means that you have to give the lender something of value for the cash. The bank holds the asset you give; perchance you default on your repayments. An unsecured advance, on the other hand, does not require collateral. The most common types of these loans include student, payday, and credit card loans.

Small business ventures are rarely given unsecured credit. In contrast, larger, established businesses with extensive credit histories do benefit from fast-unsecured lending facilities. You have to watch out when it comes to collateral for secured funding. Unscrupulous banks may target critical funds such as personal retirement funds as a guarantee. This can be very risky for the borrower.

6. Amortization Schedule

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The agreement should indicate your payment periods as well as grace periods. There should be the inclusion of prepayment penalties if any and late payment fee charges as well.

Your lender might not specify the amortization schedule. They also might not write down the amount of debt repaid each month. An amortization schedule shows the breakdown of how much debt you hold at any point. This charge will include both the principal and interest paid.

7. Default payments definition

Each lender has their interpretation of default when it comes to payments. If you have not read the fine print, you could make costly mistakes later. Does your lender, for instance, allow a grace period to help you make amends after a default notice? Has the lender indicated a Confessions of Judgment that will force you to forfeit your right to dispute your lender’s default actions? Avoid lenders with such terms.

The Bottom Line

Do not sign on that dotted line without a clear understanding of what every condition and term means. Consult your attorney or lender to avoid predatory lender trouble.