Top Four Things You Must Do Before You Sign a Loan Contract

Usually, a bank enters a contract with the borrower before a loan is disbursed. The loan contract is arguably the most important document in the loan process. This is because a loan contract clearly states the terms and conditions under which the loan is given, the obligations of the lender and the borrower. And when the chips are down, the loan contract remains the single most important document that will be referred to in the court of law.

Therefore, it is important that you understand the loan contract before you sign it. Unfortunately, many borrowers constantly fall into the traps of the bank by signing loan contracts without understanding the nitty-gritty. And that is exactly what the bank wants. They want the borrower to be ignorant of their ploys. This is why the loan contract is usually typed in small fronts with many lengthy and boring legal jargons that an average borrower will be uninterested in reading.

But you do not have to fall into the snare of the bank. You need to be a step ahead of them. That way, you’ll know what you’re signing up for and be prepared for any unforeseen eventuality. This article examines some of the most important things you must do before you sign a loan contract.

1. Do Your Own Research About the Bank

You can’t imagine how horrible it is to borrow money from a ruthless lender until you become a victim yourself. Specifically, you need to know how the potential bank you want to borrow money from treats clients in overdue. You also need to know the extent to which they value customer service and client retention. Your findings should tell you whether or not you need to sign their loan contract. You never can tell whether things will not work out as planned and that’ll put you at the mercy of the bank.

2. Look Out for the Interest Rate and the Penalty Fees

The interest rate is one of the most important aspects of the loan for a borrower. However, you should also look out for the penalty fees. Many borrowers have sold themselves into slavery by ignoring this important part of the loan contract. The interest rate determines what extra cost you have to pay for borrowing money while the penalty fee concerns what extra cost you have to pay for defaulting.

Interestingly, there are banks where the principal in overdue can double within a year due to outrageous penalty charges. So, don’t become a victim.

3. Know the collaterals involved and their liquidation values

Collaterals are basically the items a borrower is pledging to the bank for the purpose of securing a loan. Collaterals could either be soft or hard or a mix of both depending on the loan conditions. As a borrower, you must ensure that the collaterals that you’re pledging to the bank is not significantly higher than the loan you’re being granted.

Also, you must ensure that the collaterals that you’re pledging are properly liquidated. The liquidation values on the loan contract must reflect the present market values of your items. Otherwise, you’ll only have yourself to blame when the loan goes bad and you’re unable to pay.

The trick about the liquidation value is that the banks want an item that can be sold for say $1,000, for instance, to be liquidated for $500. The lower the liquidation value is, the better it is for the bank in the event that the items have to be confiscated to service the loan. So, learn to also protect yourself by ensuring that the liquidation values are not ridiculously lower than normal.

4. Seek Legal Advice

The last thing you should do before signing a loan contract is that you should seek legal advice. You have to constantly admit that you’re a layman and a legal advice will tremendously be of help. If you have access to a legal adviser, seek his opinions before you finally sign the loan contract. Always remember that everything always look good until legal eyes examine it. So, seek legal advice and protect yourself.

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