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Learn About Personal Loans

How to Understand Personal Loan Agreements, Terms and Prepayment Penalties

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Using a personal loan to take an important trip (visiting a family member who lives overseas, for instance) or to pay for a wedding could help you create memories for years to come. Before you choose a lender, however, it’s smart to compare personal loan terms so you know things like how many payments it will take to pay off the debt, whether you’ll be penalized for prepayment and other details about how the loan works.

What is a personal loan agreement?

Simply put, a personal loan agreement is the contract between the borrower and the lender. It lays out the details of the loan, including the interest rate, the length of the loan (also known as the loan repayment term) and any fees or penalties that could be assessed. The loan agreement could also contain loan repayment details — things like whether your bank account can be automatically drafted for payments — as well as personal privacy information. When you sign this agreement, you accept these terms. That’s why reading it, and understanding the terminology, is important.

Depending on the lender, the loan agreement may not include your specific details, e.g., the loan amount you are agreeing upon with its APR, monthly payment and personalized term. Look for these details in your loan letter or other disclosures.

What information is in a personal loan agreement?

  1. The loan repayment term: A loan agreement defines the length of time you have to pay off the loan. Personal loan repayment terms typically range from two to five years in length, and can go as high as seven years. Your lender may 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. Be sure you can manage the repayment term offered.
  1. Applicable fees: Fees can increase the total overall cost of the loan. Read the agreement closely to be aware of additional obligations such as origination fees, closing costs and application fees. Another cost could be a prepayment fee or penalty, something lenders may charge you if you want to pay off some or all of your loan early.

What are prepayment penalties?

Some lenders attach a prepayment penalty to loans, while others avoid this practice altogether. It’s critical to read your loan agreement and know whether you might be subject to such a fee.

If there is a prepayment penalty, the lender is required to inform you about it at the time of borrowing the money. While these penalties can vary from lender to lender, they might be a percentage of your loan balance or an amount based on how much interest the lender would lose if you pay in full before the end of your loan term.

While prepayment penalties may seem to offer little to the borrower, they can protect lenders against the loss of interest income if a borrower pays off the loan before it reaches full term, and from the borrower refinancing the loan shortly after inception.

When you have this knowledge upfront, it’s easier to choose a lender.

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.

With Discover Personal Loans, you can get up to $35,000 and the money can be sent as early as the next business day after you accept the terms of your loan. And Discover offers a 30-day guarantee if you change your mind: Within 30 days of the date your loan was first funded, if you decide that you no longer want your Discover personal loan, you can return all of the funds and you will not be charged any interest and the loan will be cancelled.

See what you might save if you consolidate higher interest debt with a loan from Discover. Estimate Savings