What to lookout for before signing a loan agreement
This article is part of a new series on debt and loans. Read last week’s article here.
The banking industry is filled with financial terms left and right — some are widely known, others not so much. And when it comes to finance, it’s normal not to know every nitty gritty detail about a transaction, but that doesn’t mean you shouldn’t know the important stuff.
Loans are financial transactions everyone has heard of. From student loans to car loans to housing loans, if you haven’t asked for one of them, then you’re at least familiar with the concept. We’re here to tell you what terms to look out for and why they’re important to keep in mind!
What’s a loan?
First things first, let’s dive into a quick and easy recap. A loan is when you borrow money from a financial institution to cover a big purchase or when you find yourself short on cash. When you borrow money from a bank, you’re expected to pay it back over a specific period of time in several installments
3 terms to lookout for
When you’re on your way to sign a loan agreement, there are different matters that need to be addressed in the contract. While they are fairly easy to understand, financial lingo can make the best of us confused. So, keep your eyes peeled for these 3 crucial terms:
Loan tenure
Every loan has a specific tenure that depends on the amount borrowed. Tenure, in simple terms, is the amount of time it takes a borrower to pay back the loan along with interest. For example, a car loan has a relatively smaller loan tenure than a housing loan, which typically takes anywhere from 5 to 7 years to be paid back. When you’re agreeing with your bank on the details of the loan, the tenure is one area that has to be clearly reflected in the agreement.
Annual Percentage Rate (APR)
APR is the first thing you should keep your eyes on when you’ve applied for a loan. When you borrow money, you are expected to repay it through monthly installments along with an extra amount (consider it a service fee) called an interest rate.
In the signed agreement, when searching for this rate, you’ll notice that it is typically reflected as an annual percentage denoted by the term Annual Percentage Rate (APR). So, to make it short, the APR is another way of saying annual interest rate.
Fixed interest rate
Different types of f loans are subject to different interest rates, which is why the interest must be explicitly stated in the signed agreement. Aside from its value, the financial institution must also declare whether the interest is fixed or variable. A fixed interest rate is an unchanging rate charged on the loan. In other terms, throughout the entire loan tenure, you will be paying the same interest rate every month. The advantage to this is that your payments will be steady throughout the entire period with no risk of unfavorable increase over time.
And there you go! Now that you’ve familiarised yourself with these terms, you’ll be more prepared the next time around. Nothing is too complicated with the right explanation. So, always make sure to go through the contract thoroughly, and when in doubt, ask!
