By Jaylin Roach
How to take out loans and repay them successfully. What to expect from a typical loan agreement and what to watch out for. What articles should a loan agreement have?
What Your Loan Agreement Should Look Like: 5 Basic Things
Taking out a loan can be a great financial experience, a quick fix for your monthly budget, and a possibility for future investment options. However, there are certain things to know before you sign a loan agreement. Learn 5 aspects you should consider when applying for loans in order not to fall into the debtor's pit.
The Size of Canadian Debt
The Canadian financial capability survey showed that 73.2% of residents have current debt or applied for a payday loan over the last year. 31% of Canadians believe they have a debt size bigger than their several monthly incomes worth.
Approximately 40% of Canadian residents have mortgages. Nine out of 10 people have applied for mortgage loans, particularly 13% of them have a remaining debt from a HELOC loan. The other type of debt includes:
- Credit card outstanding balance;
- Auto loans;
- Personal lines of credit;
- Students loans;
- Small personal loans;
- Business loans;
Plus more than a quarter of people buy food and charge other expenses daily from their credit card balances. This avalanching debt is keeping people from timely bills payments and meeting their financial obligations, let alone saving for retirement or emergencies.
These figures don’t mean that loans are bad for the budget and one’s financial freedom. Northnloans Canada, for instance, is a service that not only connects lenders and borrowers but also teaches financial awareness.
It’s perfectly normal to borrow at times to spread the cost of big expenses or cover the cost of huge expenditure items. Borrowers just have to know how to compare loan terms and choose the most reasonable for loans not to become a burden but an aware financial decision.
How to Read the Fine Section
Before you agree to loan terms the lender offers, look for information on fees and special charges. The fee print may be long and tedious, but having read these details you may avoid paying extra over the loan life. Look information on:
- Loan ongoing fees;
- Offset accounts;
- Deferred payments;
- Introductory and settlement fees;
- Redraw fees.
For the late payments fines not to come as a shock to you, look over the loan agreement carefully.
Top 5 Things to Find in an Advantageous Loan Agreement
Names and Dates
1. Clear names of loan parties and the date of the agreement. The name of the borrower and the lenders need to be stated in the agreement Traditionally, there are also addresses of these loan participants.
Dates are an essential part of the agreement as well. In order to calculate the number of monthly payments and the final payment, you should know when your financial obligation starts and ends.
2. The Loan Amount and Interest
Conventional banks and credit unions will sometimes allow people to borrow more than they ask for. This may be beneficial for some. But for others, it means repaying more than they asked for.
Private lenders are more precise with loan amounts. They determine the loan balance based on the borrower’s income and credit score. The approval rate on the requested loan amount is high with alternative lenders. But be sure to look at this point in the agreement to know what you owe the lender.
Concerning interest rates, there are two main types: fixed and variable. A fixed rate in an interest percentage is calculated onto the loan balance and doesn’t change throughout the loan life. The variable interest rate is based on the benchmark rate and can change over the loan life.
Check what type of interest the lending company offers and use an online loan calculator to estimate monthly repayments.
Default interest is another loan agreement article that defines the repayment terms. In case the borrower misses a payment, default interest can be charged from the unpaid sum of money.
3. Repayment Terms
There are certain types of repayment, one or several of which will be described in the loan agreement. Surely, a borrower should be aware of what terms repayments will be conducted.
- Repayment on demand means that the lender can specify times when the borrower must make payments. Prior to that, the lender gives the borrower a notice.
- End-of-loan-term payments imply a loan scenario where the borrower repays principal and accrued interest.
- Installment payments are often calculated for big loan amounts. In this case, the borrowers repay the loan balance plus the interest during a specified period of time.
4. Prepayment
There should be an article about prepayment penalties, if they exist, in the loan agreement. If the borrower decides to repay the loan earlier than the loan life described then the lender may count up a fee.
The lenders count on the borrowers to repay the loan balance plus the interest over a certain time period (e.g. ten years). If the borrower repays the loan sooner then the lender may lose money on the non-repaid interest. It means that figuratively the lender invests money in the borrower and if the loan is repaid sooner than agreed, the lender will collect fewer assets from the borrower.
The lender may agree to drop the interest and refinance the loan in case the agreement is for a business loan. In any case, borrowers are free to negotiate any issue they have with loan repayment, whether it is sooner or later.
5. The Force Majeure Clause
There are certain economic or unprecedented cases that may occur during the loan life. For instance, a bank or a lender may change the fixed rate to a variable one. This may end up in a bigger interest rate than it was agreed on. The lender may reserve the right to change the loan agreement points without prior notice to the borrower. So, if anything changes and the repayment suddenly becomes bigger, consult a support chat or the lender directly to negotiate future changes in the loan contract.
Another point to go through in the agreement is the collection of debt by third parties. Some banks or lenders may transfer your outdated checks to third parties for collection. Any lender should disclose information on such cases in the contract for the borrowers to avoid surprises during the loan repayment period.
While a loan application may sound tricky, it still can turn out to be a lucrative opportunity for aspiring businessmen, prospective homeowners, or small loan applicants. The key thing to keep in mind is that knowledge about your money transactions, obligations before the lenders, and rights to determine your own loan terms go a long way toward reaching financial independence.
I’m Jaylin: Guest post service planner of Leelija and full time blogger. Favourite things include my camera, traveling, caring my fitness, food and my fashion. Email: editor@leelija.com