What Are the Loan Terms You Should Be Looking For?

Do you need a personal loan to help cover an upcoming expense? If so, you aren’t alone. One recent study shows that personal loans account for a collective $192 billion in U.S. consumer debt. 

Unlike other types of loans, personal loans are usually unsecured. This means that you don’t have to put up any type of collateral, such as your house or car, to receive them. Most of the time, they also contain more flexible spending terms, allowing you to apply them toward a greater range of expenses.

However, it’s critical to carefully read the loan terms of any offer you receive. Personal loans can be lifesavers in an emergency, but you want to make sure you can afford to pay them back fully, and on time. Today, we’re sharing the most important clauses to check for in your contract, and how to make sure you’re getting a solid deal.

Interest Rate

The interest rate on your loan represents the amount of money that the lender is charging you to borrow from their funds. It is usually expressed as a percentage. During the lifetime of your loan, you’ll continue to incur interest on the remaining principal each month.

As you make your monthly payments, the money will first go toward paying down the outstanding interest. The lender will then apply the remaining funds toward lowering your principal.

It’s important to note that interest rates are usually higher on an unsecured personal loan than on a traditional, secured loan. This is because the bank or lender is assuming a greater degree of risk by taking you on as a lender, especially if you aren’t putting up any type of collateral.

There is no standard interest rate that applies to every personal loan. Instead, the percentage that your lender charges will hinge on a few different factors. In addition to market conditions, these include:

• Your credit score
• Your credit history
• Your debt-to-income ratio

If you believe your credit may hold you back from getting the best rates possible, limit your search to no-credit-check lenders. These lenders look at other qualifying criteria to determine your creditworthiness, including your income and ability to pay the loan back.

Annual Percentage Rate

There are a few different fees and costs that you’ll be required to pay when you take out a personal loan. One of those is the annual percentage rate (APR).

This is the yearly cost required to take out the loan. When you’re first comparing offers, it’s easiest to see the difference when you have a complete picture of what your loan will cost you each year. This is where the APR comes in.

This rate bundles together two important costs:

• The interest rate on your personal loan
• All associated fees

The APR is expressed as a percentage rate. By comparing one APR to another, you can easily see which loan will be less expensive in the long term. If your loan does not require any additional fees beyond the interest, then the APR and interest rate will be the same.

Borrower

The borrower of the loan is also called the applicant. If you’re the one applying for a loan, that’s you! As a borrower, it’s important to realize that you’re responsible for paying back the loan in full.

You’ll need to carefully review the loan agreement that your lender provided before signing on the dotted line. Make sure you understand and agree with all of the terms, and ask questions if you need to clarify any point. 

Co-Signer

In some situations, your credit history, income, or other issues could prevent you from securing the most favorable loan terms possible. If this occurs, you may be able to use a co-signer on your loan application. 

A co-signer is someone who signs jointly with a borrower on a loan agreement. By doing so, they take on a contractual obligation to pay the loan back themselves if the borrower is unable to make the payments for any reason.

If you don’t qualify for a loan on your own, then your lender may ask you to add a co-signer to the agreement. While this can help you get the money you need at a rate you can afford, keep in mind that it’s a significant financial responsibility and no one should take it lightly. 

In most instances, co-signers are close friends or family members of the borrower. They usually have higher credit scores, better credit histories, or a more stable income than the borrower and can therefore qualify for better terms.

Fees

In addition to charging interest on the loan, some lenders will also impose additional fees that the borrower must pay. A few of the most common types of personal loan fees include:

• Origination fees 
• Application fees
• Prepayment penalties
• Payment processing fees
• Late payment fees

You don’t want to be surprised by any fees halfway through the repayment period. Your lender should be up-front about all of these costs, including ones that are due immediately and ones that only apply in certain situations (such as late payments).

Funding Time

There will be a brief period of time between the exact moment that the lender accepts and approves your loan application and the money appears in your account. This transition period is known as the funding time. 

Repayment Period

The repayment period of your loan is the total amount of time that you have to pay the money back to the lender. You may also hear your lender refer to this as the loan amortization schedule. 

Most personal loans are divided up into monthly repayments. You’ll pay the same amount each month for the full duration of the repayment period.

The amortization schedule describes how much you will pay throughout the term length, as well as when you’ll pay. It also covers how you’ll divide the payment between your accused interest and your principal balance.

Debt Consolidation

Debt consolidation is the act of combining multiple debts, such as two different credit card loans, into one loan. If you hear a lender refer to a loan as a debt consolidation loan, it’s typically a type of personal loan. Going this route allows you to combine multiple different payments into one, which can make it easier to manage your debt. 

In addition, you may also qualify for a lower APR than you’re currently paying on your individual loans, which could save you money on interest payments. 

Fixed-Rate or Variable Rate Loan

In the section of your loan agreement that discusses interest, you might see two different terms:

• Fixed-rate interest
• Variable interest

Fixed-rate loans have interest rates that don’t change over time. The rate that’s listed in your agreement when you apply is the same one you’ll pay over the lifetime of the loan. One advantage of this option is that it makes it easier to anticipate and budget for your monthly payments, because you know they’ll always be the same. 

Conversely, with a variable-interest loan, the amount of interest that you’ll pay can fluctuate. These rates are based on national interest rates, which do not stay the same from month to month. Most personal loans are fixed-rate models for simplicity.

Collateral

While many personal loans will not require collateral, some (including car title loans) do. In this case, collateral is a type of security that backs up the loan. For instance, in a traditional mortgage, the collateral is the home that the mortgage pays for.

For a car title loan, the title to your vehicle serves as collateral. If you default on your payments and are unable to pay the money back, the lender can claim your car title as their own. 

Personal loans that require collateral are called secured loans. Ones that do not require collateral are called non-secured loans. If you qualify for a secured loan, you may be able to achieve better rates and terms.

Prequalification

To make the process of applying for a loan easier, some lenders will offer a process called prequalification. During this time, they’ll perform a high-level review of your financial details to see whether you qualify for their loan terms. Some of the most common steps they’ll perform include:

• Reviewing your income
• Reviewing your housing payments
• Running a soft credit check

Despite misconceptions, prequalification doesn’t guarantee that you’ll be approved for a loan. However, it can be a good way to determine which lenders are the best match for your needs. 

Understand These Common Loan Terms

When you understand the common words and phrases that most loan agreements contain, it’s easier to compare offers and understand which ones are the most favorable.

While these are some of the most frequently used loan terms, they aren’t the only ones. If you have any questions about anything you read, be sure to reach out to your prospective lender for more information. Never sign an agreement that you don’t completely understand.

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