Many consumers use credit as an everyday part of their lives. People routinely receive loans to purchase appliances, vehicles, mortgages or a line of credit. A loan agreement represents a legal contract between a lending institution and a personal or business borrower.
The document contains a wide range of terms and provisions, such loan amounts, repayment schedule, interest rate, late fees, and penalties, describing the lending and borrowing money of a specific amount of money.
Regulations and Loan Agreements
College students, homeowners, car buyers or small business owners must read their loan agreements carefully. Understand the different federal and state laws that affect loan agreements – directly or indirectly. This would include the following federal regulations:
- Truth in Lending Act
- Real Estate Settlement Procedures Act
- Equal Credit Opportunity Act
These are not the only federal laws. Some other regulations +that affect consumer borrowing and credit include Fair Credit Reporting Act, Fair Debt Collection Practices Act, Fair Credit Billing Act, and Consumer Leasing Act., Remember, most states have their own codes pertaining to the federal laws listed above .
With an understanding of the basic laws as a backdrop, you can review your loan agreements and understand each provision and how the provision affects your rights as a borrower. Every borrower should review loan agreements on the lookout for excessive interest rate, clauses that accelerate repayment schedule, or other downsides of the agreement that may cost you money.
The Loan Agreement
Never assume the banker is looking out for your best interest when consummating loan agreements. The laws make it mandatory that lending institution provide borrowers a clear description of terms and conditions for loan transactions. Lenders must provide certain information regarding loan before extending credit and during the transaction.
The Truth-in-Lending Act covers most of the requirements for installment loans, credit cards and home equity lines of credit. Loan agreements have several sections pertaining to the loan amount, the number of months for repayment of the principal, and the finance charge applied by the lender.
Other information includes the following items:
- Annual Percentage Rate (APR)
- Lender must disclosed any security interest in property owned by the consumer
- Describe what circumstances generates late payment fees and the amount
- Disclosure of penalty for prepayment of the loan
- Identify a “variable rate” loan
A loan agreement that has a variable rate of interest must also include a description of the calculation the lender use to determine the loan interest rate.
Be Aware Before Signing the Loan Agreement
Make sure you have been realistic about your finances and can afford the loan. Review the loan documents to make sure they contain the terms you agreed to and the deal looks just as good on paper. Borrowers need to pay particular attention to the following items in their loan agreement to clause related to late charges, grace periods, and loans fees.
Look for mortgage insurance language and make sure you know how it works. Have the lender explain and clarify anything you don’t understand. If you are unsure, you can always have your attorney look over the loan agreement before signing.