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Using a personal loan for something important—like a home repair or large medical expenses—can be a great option when money is tight. But before you choose a lender, make sure you understand the terms of the loan agreement.

Your loan agreement will tell you exactly how long it will take to pay off your debt, whether you’ll be penalized for prepayment, and other important details about how the loan works.

A basic review of the terminology will help eliminate any surprises down the road, so here’s what you need to know about personal loan agreements:

A personal loan agreement is a binding contract

It lays out the details of the loan—including the interest rate, length of the loan (or the loan repayment term), and fees or penalties that could be incurred. The loan agreement might also include loan repayment details—such as whether payments can be automatically debited from your bank account—as well as personal privacy information.

Also note that for some lenders, information on the loan amount, the annual percentage rate or APR, monthly payment amount, and the loan repayment term might be included in a loan letter or other disclosures—instead of in the loan agreement itself.  

When you sign the loan agreement, including by electronic signature, you accept these terms. That’s why it’s essential to read and understand all your loan-related correspondence.

The loan repayment term might be flexible

A loan agreement defines how long you have to pay off the loan. Personal loan repayment terms typically range from two to five years and can go as high as seven years. And you might be able to choose the term length that works best for you. For example, a longer term typically allows you to make smaller monthly payments, but you’ll pay more interest over the life of the loan; a shorter term could require larger payments but cost you less in interest.

This is important to think about, especially if you’re planning to use the loan to pay off credit cards. You’ll want to be sure you can manage the monthly amount that your payment term requires before agreeing to it.

Applicable fees could increase your costs

Fees can increase the total overall cost of the loan and are charged on top of any interest you pay. Read your agreement closely, with an eye to origination fees, closing costs, application fees,  and prepayment penalties (explained below). Discover Personal Loans doesn’t charge any of these upfront fees and there are no fees as long as you pay on time.

The amount of these fees will vary based on the size of the loan and can add up quickly. So, when you’re choosing a lender, be sure to compare fees (along with interest rates) so you can minimize or avoid them.

You might be penalized for early repayment

You may think it’s always a good idea to pay back a loan as soon as possible. But some lenders charge a prepayment penalty—in other words, a fee you will pay for paying back your loan early. This is yet another reason to read your loan agreement carefully when choosing a lender and compare your options.

Lenders are required to inform you about prepayment penalties before you agree to the loan terms. The amount of the penalties themselves can vary. They might be a percentage of the remaining loan balance, or an amount based on how much interest the lender would lose if you paid in full before the end of the loan term.

Prepayment penalties exist to protect lenders against the loss of interest income, such as if a borrower refinances the loan and pays it off shortly after it begins. Of course, as a borrower you want to do everything you can to avoid extra penalties like these.

So if you’re considering a personal loan to pay down debt, renovate your kitchen, or pay off medical bills, be sure 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.

Running the numbers is key

Once you know how much you’d like to borrow and you understand the loan agreement, you can figure out how a personal loan could help you meet your financial goals and get started right away.

With Discover Personal Loans, for example, up to $35,000 can be sent by the next business day if you’re approved for and accept the loan.

And, to make sure you’re happy with your choice, Discover offers a 30-day guarantee: If you change your mind within 30 days of the date your loan was funded, just return the funds. You won’t be charged interest, and the loan will be cancelled.

See what you could save by consolidating higher interest debt with a Discover personal loan. Estimate Savings