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How to Read the Fine Print on the Terms of a Personal Loan

[May 1, 2009.]


It looks like a "Credit Card Holders' Bill of Rights" of some sort is going to pass Congress within the month. One part of the bill in discussion addresses the so-called "fine print" that so confuses credit card borrowers. President Obama himself has called for a return to "plain language."

Whether or not this part of the bill makes it into law, it's high time that borrowers read--and understand--the terms and conditions of the loans they take out. While unsecured personal loans are customarily simple in relation to credit card loans, it does require some technique to fully "get it."

Here, then, are a few recommendations for what exactly to look for in the fine print of an unsecured personal loan:

Does the Interest Rate Change, Or Remain Fixed for the Life of the Loan?

This is a huge consideration.

There are a good number of personal loan programs that offer a fixed rate and fixed repayment schedule. However, for borrowers with bad credit, these plain vanilla personal loans may be considerably harder to come by.

But fear not. Instead, comb the fine print for the reasons why an interest rate may adjust, or a time frame of when. Sometimes, an unsecured personal loan interest rate will rise if a payment is missed. In other instances, the interest rate may rise after a certain period of time, say six months.

Be aware of interest rate change possibilities and time frames. An interest rate that's higher by only a point or two can cost you a lot of money in the long run.

In the Event of Default, What Happens?

Of course it's always best to avoid defaulting on a personal loan. But with the unemployment problem persisting, it's very difficult for most people to feel 100 percent confident of a steady paycheck.

Consider, then, as that fine print gets combed, what recourse the lender is entitled to take in the event of late or non-payment of the personal loan. This often comes into play when an unsecured personal loan, somewhere along the loan process, became secured by a certain asset, such as a car. Auto title loans are becoming common these days, and allow the lender to seize a car if the loan isn't paid back.

Remember: the loan you apply for isn't always the same loan you end up getting. Borrowers who don't look through the fine print can miss that big picture.

When One Part of the Fine Print Doesn't Make Any Sense At All, Ask Questions and Get Answers

A major cause of the subprime lending disaster was the fact that loan documents were so hard to understand, and people weren't really willing to work to understand them, anyhow.

Look at all the problems this dynamic has caused. Let's all learn from those mistakes. Be a smart loan shopper.

In today's day and age, demanding an explanation of what a particularly difficult to read section of the fine print says, in plain English, does a service to both borrower and lender alike. Any lender that is not willing to explain its policies to the satisfaction of its customers isn't a good lender to work with.

Good lenders, by contrast, are happy to explain the terms of a contract to a borrower. Good lenders, in fact, take that as a sign that this borrower is seriously committed to fulfilling the terms of said contract. In the case of a personal loan, the contract isn't that complex, and can definitely be understood.

Fine print and all.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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