Using a personal loan for something important—like a home repair or large medical expense— may be an ideal option depending on your financial situation. If you do end up shopping around for a lender, be sure to take a close look at all loan agreement terms.
To help you avoid surprises down the road, this article will explore what a loan agreement includes, what to check before accepting, and how key terms affect total cost and payoff timing.
What is a personal loan agreement?
A personal loan agreement is a legal document that outlines the conditions of the loan. Also called a personal loan contract, it holds both the lender and borrower accountable and can include the repayment term, APR, monthly payments, fees, prepayment rules, and autopay requirements. It is intended to ensure that the money is repaid without the need for legal action.
What are typical personal loan term lengths?
Personal loan terms can vary by lender and loan amount but typically range from two to seven years. Terms are often offered in yearly increments, though you might see them expressed in months. For example, a three-year loan might be stated as a 36-month loan.
Let’s take a deeper dive into the details of a personal loan agreement.
A personal loan agreement is a binding contract
A personal loan agreement lays out the details of the loan, including the interest rate, repayment term, and fees or penalties that may be incurred. The loan agreement might also include loan repayment details—such as whether payments may be automatically debited from your bank account—as well as personal privacy information.
Also note that, for some lenders, information on your specific loan amount-like your annual percentage rate or APR, the monthly payment amount, and the loan repayment terms-might be included in a separate letter or in other disclosures instead of in the loan agreement itself.
When you sign the loan agreement, including by electronic signature, you accept these repayment terms. That’s why it’s essential to read and understand all your loan-related correspondence.
How long do you have to pay back a personal loan?
A loan agreement defines how long you have to pay off the loan. A shorter loan agreement may make more sense if you’re borrowing a small amount of money or can afford a higher monthly payment. That means you’ll pay off the loan faster and could save money on interest. If you’re borrowing a large amount of money or need to keep monthly payments low, a longer loan term might work better for you. Although, this may mean potentially paying more in interest over time.
This is important to think about, especially if you’re planning to use the loan to pay off credit card debt. Be sure you’re comfortable with the monthly amount that your repayment term requires before agreeing to it.
Applicable fees may increase your costs
Fees may be charged on top of any interest you pay. As a result, they may increase the total cost of the loan. Not all lenders charge the same fees so read your agreement and related disclosures closely, with an eye to origination fees, closing costs, application fees, and prepayment penalties (explained below). With Discover® Personal Loans, you’ll pay $0 origination fees, $0 closing fees, and no fees of any kind.
If your loan does include fees, the amount of these fees may vary based on the size of the loan, and it could add up quickly. When you’re choosing a lender, be sure to compare fees (along with interest rates) so you’re able to minimize or avoid them.
What is a prepayment penalty on a personal loan?
A prepayment penalty is a fee some lenders charge if you pay back your loan earlier than what’s outlined in your loan agreement. This fee may be a percentage of your loan balance, the interest your lender misses out on since you paid off early, or a fixed fee. This will be outlined in your loan agreement and is another good reason to compare your options when choosing a lender.
Of course, as a borrower you want to do everything you can to avoid extra penalties like these. At Discover, there is no penalty if you pay off your loan early.
Whether you’re considering a personal loan to pay down debt, renovate your home, or pay off medical bills, it makes sense to review and understand the loan agreement. That way, you’ll be able to choose the lender—and loan terms—that are best for you.
Other agreement details to consider
Besides repayment terms and potential fees, you’ll also want to review other important details before you sign. Here’s a quick list of things to look out for:
- Due date timing
- Late-payment consequences
- Autopay terms
- Conditions that may appear outside of main agreement
Crunching the numbers is key
Once you know how much you’d like to borrow and you know how a personal loan could help you meet your financial goals, it’s important to understand every aspect of the loan agreement. Before signing, you should consider each section and any other potential disclosures.
After reviewing term length, fees, and payoff conditions, use our calculator to see your estimated payments.
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The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover, a division of Capital One, N.A., or its affiliates.