Reading the Fine Print: What to Watch Out for in a Loan Contract
Reading loan contracts requires a certain level of comprehension. This is why acquiring the services of a debtor attorney is important, regardless of whether you’re applying for an auto loan, a home title loan, a business loan, or any other credit. A lawyer can help you understand a loan contract end to end and protect you from the schemes of greedy lenders.
With the help of your lawyer, here are three terms you should look out for when closing a loan agreement.
- Late Fees
Late payment fees are a common imposition in personal loans. If you miss a due date, the lender can charge a penalty fee about 5 percent of the overdue amount, but some charge a higher or lower percentage, or a flat fee. Late fees are legal unless the creditor engages in pyramiding.
A pyramiding late fee occurs when after missing one due date, the creditor deducts your current payment from your overdue fees first and then allotting the remainder for that month’s payment. For example, your monthly due is $100 and the late fee is $10. When the lender receives your regular payment worth $100 a few days late from the payment period, they will use the first $10 for the late fee. This means the money that goes to your regular payment totals only to $90. Since you’re $10 short, the lender will impose another late fee for the next month.
Your late fees pyramid when you’ve missed only one payment period yet the creditor deems your payments late for consecutive months. You can avoid this by clearing the lender’s terms and conditions for late payment during the closing of the deal.
- Prepayment Penalty
Private lenders profit from the interest they charge, as well as the additional fees they impose. If you manage to pay your loan on time, without incurring late and such fees, the creditor doesn’t make as much profit as they anticipated. So, the lender ensures a sizeable profit by imposing a prepayment penalty.
A prepayment penalty is the opposite of a late fee. The lender imposes this if you pay off the amount you borrowed earlier than the due date. Prepayment penalties are illegal in some states for certain types of loans, but they are allowed for mortgages, only if the loan follows the following qualifications:
- The annual percentage rate (APR) of your loan can’t increase after you take out the loan.
- It’s a qualified mortgage.
- It’s not a higher-priced mortgage loan.
Safeguard your finances by making clear early on that you don’t want a prepayment penalty. Ask the creditor where it states on the contract that there are no prepayment penalties before you sign any document. Your lawyer should also double check the agreement papers since the creditor can hide this condition under reworded phrasing.
- Balloon Payment
Some lenders try to attract more customers by setting regular payments at a small price. But then they impose a large final payment, which is a balloon payment. Balloon payments are potentially dangerous, especially since they prey on those who can only make small payments at a time. If you fail to meet the final payment, the creditor can repossess the collateral you pledged.
Some states prohibit balloon payments for loans which involve people with irregular incomes. Other states don’t have the same provision but require creditors to give borrowers the right to refinance without penalty.
Review your contract to see if the payment terms are dubiously low and if there is a balloon payment imposition.
Your best bet against a safe and secure loan agreement is by getting the help of an experienced lawyer. But even if you have sought legal advice, it pays to be knowledgeable about the common schemes of untrustworthy lenders so you know what to watch out for.
