After applying for a loan and going through the approval process, the final step is actually signing a legally binding contract. It is at that moment that you become responsible for the loan and everything in the document. You want to be certain that everything is in order. Here are five key items to consider before signing a loan contract.
Total Cost of the Loan
The first item to consider is the total cost of the loan. You are not just repaying the amount you are borrowing. You are also going to have to pay interest. Additionally, you need to look for other fees and costs. Something to understand is that disclosure can be an issue especially with mortgages and auto loans. You need to read over the contract and see if there are closing costs, fees along the way or increases in interest tied to factors outside your control. Try to get the clearest picture possible of exactly how much you will end up paying for borrowing the money. Do not sign if that number is too high.
Penalties for Late Payments or Pre-Payments
The second thing to consider is whether there are penalties for late payments or pre-payments. There is almost always some penalty when your monthly payments are late. Make certain you understand and accept that penalty since you never know what could happen in the future. You also want to check if there are penalties for pre-payments. That penalty is an amount you are charged if you decide to pay more than you are supposed to in a month. You need to know whether you have the ability to make pre-payments or whether you need to always stick to the schedule.
Affordability of the Payments
The median amount of household debt is over $70,000 in the country. You have to consider whether you can afford the loan payments before signing a contract to prevent taking on more debt than you can handle. Go through your expenses and income to see what is left. You need to be sure that you can make payments every month comfortably for the entire term of the loan. Do not sign the contract if you are uncertain about your ability to repay the loan on time.
Certain types of loans have spending restrictions on the money that you receive. You need to look through the agreement to see if there are any restrictions present. This can sometimes happen with lenders who require collateral in order to approve a loan. It is common with mortgages and car loans. Those contracts state that you can spend the borrowed money only on a house or vehicle. You want to check that you are able to purchase what you need with the money before signing the loan.
A final point to consider is whether there are privacy issues. Although it does not always happen, some lenders put language in a loan contract that grants permission to sell your information, request personal data from various institutions or even look at your bank accounts. Look through the wording to see if that type of language is present. Sign the contract only if you are comfortable with what is listed.