3 Clauses to Be Aware of in Personal Loans

You have probably heard many times that you should always “read the fine print” in contract situations, but that is because it is a very true statement. Some lenders may try to trick borrowers into signing a contract with clauses that will benefit the lender and that will cost the borrower a lot more. Not all banks will use these clauses, and sometimes they are unavoidable. However, you should always be aware of all of the terms you are agreeing to before you sign any contract, and if you are unable to avoid a clause you do not agree with, then you should seek out another lender.

Early repayment penalties

Most banks use early repayment penalties in order to discourage borrowers from paying off their debts early. This is because the longer a borrower takes to pay off their debt, the more money they will have to pay the bank in interest. This penalty payment could be equal to one or two months’ worth of interest, but every bank has a different policy. These charges could add a considerable amount to the cost of your loan, and may not be worth it in the end.

If you think you may be able to pay back your loan before it is due, make sure you either shorten the time period of your loan initially or avoid this clause all together. Find out which banks will apply these charges and which banks will not. Then, you can decide what lender will be right for you.

Reset clause

If a contract for a fixed loan contains a reset clause, that means the loan’s interest rate may not stay fixed for the entire loan term. The interest rate will be subject to change after a specific amount of time if the bank should decide to do so. For example, if you were to take out a loan with a payback period of 20 years and a fixed interest rate of 9%, you may think that you will only have to pay 9% in interest over those 20 years. However, with a reset clause, the bank could potentially increase your interest rate every couple of years, which would not be in your best interest at all.

Experts have said that many banks have a reset clause with any fixed rate loan, but some of them do not inform their customers about the clause. These customers are under the impression that the loan will always have the same interest rate, and they are then surprised when the rate suddenly changes. Before you take your chances with a fixed rate loan, make sure you ask about this potential clause and the terms that may apply to your loan.

The Cross Collateral Clause

Some loans require a form of collateral. Usually with these agreements, the bank will include a cross collateral clause in the contract. This clause states that the collateral with the loan will also secure other loans and accounts with that lender. Most of the time, these lenders do not tell customers about this clause, and they are therefore stuck in the agreement after signing. If the collateral was, for example, a car, you may not be able to sell it even after you pay off the car loan because the bank would still be able to hold the title of the car to secure your other loans.

If you apply for a loan that requires collateral, you should always check for a cross collateral clause. Even if you don’t have an additional loan to pay off right now, you may decide to take out another loan in the future. At that time, the lender will still be able to use your collateral for the new loan, even if you wouldn’t normally need it, and you will be out of luck.