The fine print on a loan application

Loan fine print terms you need to be aware of

Getting a new loan can be exciting because it usually means you’re getting something new and expensive. Unfortunately, it’s easy to get caught up in all the fun parts of new loans while ignoring the negative parts. Namely, when you get a loan, you’ll have to make large monthly payments for years, and the interest can be staggering.

Here are some loan fine print terms you need to know about so you can get your loan paid off as soon as you can.

Pre-approval

When you see an advertisement or are promised a pre-approval, be aware that this doesn’t necessarily mean that you’ll get the loan. Despite the language used, pre-approvals are not approvals, and are subject to change. Before you sign any loan documents, read the paperwork to verify that you understand the terms of the loan and know what the interest rate is.

Pre-payments

Depending on your loan and your lender, you might be allowed to make pre-payments. Pre-payments are extra payments on your loan to reduce the duration of the loan and the interest you’ll need to pay. These payments are not in lieu of regular payments—for example, if your monthly payments are $100, you can’t make a $500 payment and then not pay for five months.

Interest rate and compound interest

Be sure you understand your interest rate and how it compounds. A fixed interest rate is one that stays the same for the duration of the loan term. A variable rate is an interest rate that changes, sometimes frequently. Interest that compounds semi-annually means the interest charges are calculated twice a year, while interest compounded monthly is calculated each month.

Credit history reporting

Not all loan companies report to credit bureaus. If you have taken out a loan to help improve your credit history, make sure you read the fine print and find out for sure whether timely payments will be reported to credit bureaus. Without this reporting, your payments will have no effect on your credit history.

Interest Rate Differential (IRD)

This is a big term for mortgages. If you are in a situation where you want to pay off your mortgage (usually the result of selling your home), you might find that you are being charged an interest rate differential (IRD) penalty, if this penalty is greater than three months’ interest.

Lenders calculate this penalty differently, but usually it’s the difference between the posted rate when you took your mortgage and the current rate of a mortgage whose term matches the remaining time on your loan. Depending on how this is calculated, it can run in the tens of thousands of dollars, so be sure you understand how this penalty is calculated before you take out the loan.

Getting a loan is stressful. To reduce this stress and avoid any potential problems in the future, be sure to read the fine print before you sign. By understanding your loan documents and learning these terms you need to know about, you can get a loan with confidence.