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June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Loan agreements can range from simple to complicated depending on the lender and the type of loan you're getting. Home, auto, student, personal and business loans -- they all use their own unique language. Nonetheless, all loans have a few key elements in common. Here are definitions and descriptions of some of the terms and features you're likely to come across in just about any loan agreement.
This is the total amount of money you will be borrowing -- the principal loan amount.
Annual Percentage Rate
The annual percentage rate (APR) is the cost of the loan on a yearly basis taking into account finance charges, fees and other expenses, expressed as a percentage. The APR will likely be higher than the interest rate you are quoted, since non-interest finance charges and fees will bump it up. Lenders must disclose the APR as part of the Truth-in-Lending Disclosure Statement (defined below).
This clause specifies what actions the lender can take if you default on the loan (in other words, you don't pay it off according to the terms of the contract).
The finance charge is the cost of borrowing the money, including all fees and interest charges, over the life of the loan.
The interest rate is what the lender will charge you for borrowing money calculated as a percentage of the outstanding loan balance. Interest rates can be either fixed or variable. The rate and method of calculation will be disclosed in the loan agreement.
A late charge is the fee you'll owe as a penalty if your monthly loan payment is past due.
Some contracts will allow you to pay off the loan early without consequence; others will charge you a prepayment penalty. Your agreement should tell you which is the case with your loan. Prepayment terms might restrict how much you can pay toward the principal of the loan each year or in the first several years of the loan.
The repayment schedule specifies what your monthly payment will be, as well as the starting and ending dates for the entire repayment period.
Truth-in-Lending Disclosure Statement
Federal law requires that this statement be provided to all borrowers; it specifies the amount financed, the annual percentage rate (APR), the finance charge expressed as a dollar amount, and the total of payments over the life of the loan.
The example below is for a 10-year $10,000 loan at a 7.5% interest rate. In this case, because there are no additional fees, the interest rate and the APR are the same. But be aware that if there were other loan charges (such as points in the case of a home loan), the APR, which is the true cost of financing, would be higher than the interest rate.
If you don't understand something in your loan agreement, ask the lender -- or your attorney -- for an explanation. You have the right to understand every detail of the agreement before you sign. Though reading and understanding the fine print isn't always easy, doing so before you sign on the dotted line can save you time, money and headaches in the long run.