Things to know before signing a personal loan agreement

Know what a personal loan agreement is and what factors to consider before signing it.
Things to know before signing a personal loan agreement
5 min read
07 August 2023

Individuals may sometimes find it difficult to make large expenses in one go. In such cases, a personal loan becomes a useful choice for managing financial needs. Personal loans are typically unsecured, meaning they are not backed by any collateral, such as a house, gold, or a car. You can utilise these funds for various purposes, such as managing medical expenses, higher education, covering unexpected expenses, or funding any major purchases.

However, before accepting a personal loan offer, one of the crucial documents that you must be aware of is the ‘personal loan agreement’. Let us understand the meaning of a personal loan agreement and the things to know before signing it.

What is a personal loan agreement?

A personal loan agreement is a legally binding contract between a lender and a borrower. It establishes the terms and conditions under which the lender agrees to lend a specific amount of money to the borrower.

The agreement outlines crucial details, including the loan amount, interest rate, repayment schedule, loan term any other agreed upon between the lender and the borrower. It also specifies any fees or charges associated with late payments or early repayment. By signing the personal loan agreement, the borrower agrees to repay the loan according to the specified terms. Failure to meet these obligations can result in consequences, such as additional fees, negative impacts on the borrower's credit score, or even legal action by the lender.

What are the things to know before signing a personal loan agreement?

Before you accept and sign a personal loan agreement, it is essential to be fully informed about it. Here are some crucial things to know before signing a personal loan agreement:

  • Interest rates and APR:
    Understand the interest rate and the annual percentage rate (APR) associated with the loan. The interest rate represents the cost of borrowing, while the APR takes into account not just the interest rate but also any additional fees charged by the lender. Ensure that the APR is competitive and reasonable, as it will directly impact the total cost of the loan.
    Additional read: APR vs APY
  • Loan terms and repayment period:
    Review the loan term and the repayment schedule carefully. Personal loans often come with fixed monthly payments over a specific period. Longer loan terms may result in lower monthly payments but may lead to paying more in total interest over time. Choose a repayment period that aligns with your financial capabilities.
  • fees and charges:
    Be aware of any additional personal loan interest rate associated with the personal loan. Some common fees include processing fees, prepayment penalties, and late payment charges. Ensure you understand when these charges and their impact on the overall loan cost.
  • Financial impact:
    Before taking out a personal loan, carefully assess your financial situation. Calculate the monthly payments and ensure they fit comfortably into your budget. Taking a loan that stretches your finances too thin can lead to financial stress and potential defaults.

In conclusion, a personal loan can be a valuable financial tool when used responsibly. To make an informed decision, take the time and read all aspects of the personal loan agreement, including interest rates, fees, repayment terms, and your financial situation. By doing so, you can confidently sign the agreement, knowing that it aligns with your financial goals and capabilities. In case of any doubts or concerns, seeking advice from a financial advisor, or your relationship manager may help. Separately, you can also use an online EMI calculator to gain valuable insights into making the right choice for your financial requirements before taking out a loan.

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