Using a personal loan to take an important trip (visiting a family member who lives overseas, for instance) or pay a wedding could help you create memories for years to come. However, before you make a decision, it’s important to review personal loan terms and understand how many payments it will take to pay off the loan so you can prepare. You also want to consider if it will cost you to pay it off early and other elements of how the personal loan works.
What Is in a Personal Loan Agreement?
It’s important to read the loan agreement.
The loan agreement is where you’ll find items like the loan term and interest rate ranges.The loan agreement could also contain loan repayment details – things like whether your bank account can be automatically drafted for payments – and also personal privacy information.
One critical item is the length of time you have to pay off the loan. Personal loan terms typically are two to five years in length, and sometimes up to seven years. Ideally, your lender will give you a choice of several different term lengths. This is important, especially, if you are using the loan proceeds to pay off credit cards.
A credit card is a revolving loan that doesn’t require you to pay it off in a set time period. A personal loan is a fixed-term loan, so the payments are set so you can pay it off in full at the end of the loan term, assuming you make all of your monthly payments. If you prefer to make a higher monthly payment so you can pay the loan off faster, and potentially save some money on interest versus a longer term, this is great as long as the payments fit in your budget.
The loan agreement will also provide information on fees. Some personal loans may have fees. Some types of fees include origination fees, closing costs and application fees. These upfront fees increase the total overall cost of the loan. A prepayment fee is another charge that can be assessed, if you pay the loan off early. There is no prepayment penalty on personal loans from Discover, and Discover also offers personal loan terms of 36, 48, 60, 72, or 84 months.
How Do PrePayment Penalties Work?
A prepayment penalty is nothing more than a fee that lenders charge if you want to pay off some or all of your loan early.
If you’re considering a personal loan, it’s important to take note of any prepayment penalties a given provider might charge, because this could add to the overall cost of the loan.
If there is a prepayment penalty, the lender is required to inform you of this at the time of borrowing the money.
Some lenders attach a prepayment penalty to loans, while others avoid this practice altogether.
As a borrower, there is no real benefit of a loan with a prepayment penalty. Conversely, the downfall is that you don’t have the opportunity to pay the loan off early, unless you want to pay an additional fee.
The lender is the one that benefits from this arrangement. Here’s how:
- The lender is protected against the financial loss of paid interest in the event that the borrower pays off the loan before it reaches full term
- Protection against the borrower refinancing the loan shortly after inception
How Much Is a Prepayment Penalty?
It’s not enough to know that your loan has a prepayment penalty. You must also have a clear understanding of how much you’ll pay if the penalty comes into play.
These penalties vary from lender to lender, which is why it’s so important to compare your options. If you’re going to secure a loan with a prepayment penalty, you’ll want to opt for the one that has the most favorable terms.
A prepayment penalty can include one of the following:
- A fixed amount that never changes, even as you pay down your loan
- A percentage of the remaining balance
Mortgages are the most common type of loan with a prepayment penalty, but personal loans can also include this condition (Good news! Discover does not).
When you have this knowledge upfront, it’s easier to choose a lender.
Discover Personal Loans can send the loan proceeds to you or directly to your creditors as soon as the next business day after acceptance. And there’s a 30-day guarantee if you change your mind. Even after you’ve received the money, you can simply return the funds within 30 days at no cost.
So if you’re considering a personal loan to pay down debt, take your dream vacation or pay for a wedding, be sure to review and understand the loan agreement to make the financial decision that’s best for you.