Jun 14, 2024
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. The loan agreement tells 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 within a personal loan agreement might help eliminate surprises down the road.
A personal loan agreement is a legal document that outlines the repayment term (or length of the loan) and other conditions of the loan. Also called a personal loan contract, it holds both the lender, such as a bank or credit union, and the borrower accountable. It is intended to ensure that the money is repaid without the need for legal action.
Let’s take a deeper dive into the details of a personal loan agreement.
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.
A loan agreement defines how long you have to pay off the loan. Personal loan repayment terms typically range from two to seven years and may go as high as 12 years if you’ve borrowed a large amount.
Ideally, you should look for the option to choose the repayment term that works best for you. For example, a longer repayment term typically allows you to make smaller monthly payments, but you’ll pay more interest over the life of the loan. A shorter term might 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 card debt. Be sure you’re comfortable with the monthly amount that your repayment term requires before agreeing to it.
Fees may be charged on top of any interest you pay. As a result, they may increase the total cost of the loan. Read your agreement 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 as long as you continue making payments on time .
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.
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 another good reason to compare your options and to read your loan agreement carefully when choosing a lender.
Lenders are required to inform you about prepayment penalties before you agree to the loan repayment terms. The amount of the penalties themselves may 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. 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.
Once you know how much you’d like to borrow and you understand the loan agreement, you can figure out how a personal loan may help you meet your financial goals and then get started right away.
With Discover Personal Loans, for example, up to $40,000 can be sent right to your bank account or to many of your creditors. In December 2023, one Discover Personal Loans customer described their experience like this: “Fast and easy. Very impressed by the ease of the process. Would definitely apply for another loan in the future.”
See what you might save by consolidating higher-interest debt with a Discover personal loan.
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