Personal Loans

Personal Loan Contract: What You Should Know

Personal loan contract

Are you in need of a personal loan? Most people are familiar with the loans they use to buy homes and cars, but what about smaller unsecured loans? The finance charges you pay to borrow small amounts of money range from the reasonable to the ridiculous. Here’s a few tips about the personal loan contract to help you avoid paying too much for small unsecured loans.

Personal Loan Contracts

Your personal loan contract is the loan agreement you’ll sign to borrow money. The contract, loan terms, and fees you encounter vary widely from one lender to the next so it’s always best to shop around.

Your personal loan contract is an agreement between you and the lender you choose and states the amount the lender will loan you and specifies when the loan will be repaid. This document goes by several different names and could be called a loan contract, loan agreement, or a promissory note. Regardless of what your document is called, when you sign on the dotted line you’ve agreed to whatever terms are contained in the document.

Types of Loan Agreements

There are two basic types of personal loan contracts. You can borrow cash on a personal loan contract that is unsecured, meaning there is no collateral backing the loan, or you sign a secured loan agreement which requires collateral. When borrowing small amounts on a secured contract, the collateral required is often your car title. These loan agreements are considered secured because in the event of default, the lender can take whatever collateral is specified in your personal loan contract.

Loan Security Agreement

Your personal loan includes a security agreement in addition to the promissory note. The security agreement allows the lender to take collateral in the event of default. Most people are familiar with car title loans which is a secure loan agreement. Default on a car title loan and the lender will take your car.

Interest Rate & Fee Disclosure

Before signing your loan contract make sure you understand the interest rate, repayment term, and fees associated with your loan. Many unsecured personal loans come with exorbitant interest rates. Banks and credit unions typically offer the most reasonable interest rates where “payday loan” lenders found in strip malls routinely charge as much as 521% interest.

If you borrow from one of these payday lenders the loan contracts often include unreasonable term lengths to promote refinancing. Instead of paying off the loan the borrower pays the finance charge to roll the balance into a new loan contract, making it nearly impossible for many borrowers to ever repay the loan. These types of predatory lending practices are being targeted by the legislatures in many States but as a whole there are very few protections for borrowers of small unsecured loans.

Banks and credit unions are still the best sources for small personal loans; however, they rely heavily on your credit score for loan approval. If you lack sufficient credit, you may be forced to rely on a less favorable lender to get your loan funded. Careful examination of the personal loan contract could help you avoid being a victim of predatory lending.


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