What to watch out for in a loan contract

BUSINESS BITS
Reeza Singzon

Getting a loan if you don’t read and understand the fine print before you sign on the dotted line of the contract could turn into a nightmare later..

So you just got a big raise and are in the big league now, and to validate your new status, you want to buy a new house or start a new business and hope to become one of the successful Filipino entrepreneurs.

First thing to remember: You pay a steep price every time you borrow money. That price is called interest. And if you miss a scheduled payment, you would also have to pay the penalties as stipulated in your loan contract. Then, if you miss too many payments, you could face foreclosure, and that also depends on the stipulations in your loan contract.

That is why you should treat your loan contract as if it were a newly landed extraterrestrial object. Scrutinize it, go over every inch of it at least three times, and--you've probably heard this many times before--read and understand the fine print very carefully.

Beware of predatory lending, in particular. This is when lenders try to pressure borrowers into signing loan agreements that they have not yet thoroughly reviewed. These predatory loan agreements contain loan stipulations that the borrowers can't afford or are highly disadvantageous to them.

Here are 15 other things you should do or watch out for before signing any loan agreement:
1.Compare the loan rates of different lenders. Before making your decision to borrow, look into the annual loan interest rates of different lenders. Choose the rate that's most advantageous to you.
2.Clarify the terms of the loan. Don't be shy to ask questions. After all, you'll be signing away a huge chunk of your monthly income; you deserve to know where it will all go. Check the stipulations contained in the loan contract and make sure that they match the terms you are agreeing to.
3.Read the entire loan contract three times and take special care to go over the fine print. If the fine print is too small, use a magnifying glass. Don't be afraid to look odd or overcautious in the presence of your loan officer. Better to look silly than be foreclosed.
4.Have your own lawyer or financial consultant interpret the entire contract for you. Don't rely on your loan officer's interpretation, and neither should you rely on legal or financial experts provided by the lending company.
5.Watch out for concealed or disguised fees and charges.
6. Beware of steep interest rates and penalties. Ask a professional financial or credit advisor if the figures contained in your loan contract are fair.
7.Beware of add-ons with high costs, such as insurance. You don't have to accept any add-on if it's not priced competitively; shop around for it separately to get a better deal.
8. Make sure you understand your obligations under the contract before signing it. Never sign blank forms and never leave any blanks in any loan application or agreement.
9.Never sign documents with incorrect or incomplete information.
10.Never rely on verbal assurances or promises. Insist that those terms be put in writing.
11.Never make a false statement on your loan application. Doing so could land you in prison.
12.Never let anyone falsify information to help you qualify for a loan. Both of you could end up in prison.
13.Beware of loan offers that sound too good to be true. Lenders sometimes make false promises just to get you to sign on the dotted line.
14.Never trust a loan officer who insists that you sign right away. Ask for some time to review the contract. If he persists, walk away and look for another lending institution. Also, beware of balloon payments that require a large lump sum payment at the end of the term of your loan. This could lead to expensive refinancing, which in turn could lead to foreclosure.
15.Clarify the prepayment penalties. A prepayment penalty on a loan is a penalty that you pay for paying off your loan early. Prepayment penalties are usually equal to a percentage of the outstanding balance at the time of the prepayment. Sometimes they are calculated as a specified number of months of interest.

There shouldn't be any penalty when you prepay; it's your right to pay off your loan when your financial circumstances improve. However, when you prepay, lenders lose income--the interest you were supposed to pay for x number of years or months. If it can't be helped, just be sure that the prepayment penalties are not excessive. Ask your credit advisor what penalty terms are fair.

This may seem like a long list and, in your excitement, you may be inclined to take shortcuts, especially if this is your first time to get approved for a loan. Remember, though, that there's nothing to be lost in being cautious, whereas if you cut corners, you could literally lose your business or your new house, and your savings as well.