Understanding the Fine Print of a Loan Can Save You Money and Grief

Understanding the Fine Print of a Loan Can Save You Money and Grief

If you have ever obtained a mortgage to buy a house or borrowed money to buy a car you are very familiar with the mountain of paperwork that can be required during this process. Most people simply don’t have the time to sit there and read all of the fine print and others actually read it but may not fully understand it.

Don’t Be Embarrassed if You Don’t Understand

When someone explains something technical or difficult to grasp and then asks “Do you understand?”, the response is typically “yes.” Either it is because you want to get through the process quickly, you don’t think it is very important or you don’t want to feel embarrassed that you don’t understand a concept. This could end up being a costly mistake. If you don’t understand something or if you see conflicting information it is in your best interest to stop and ask questions.

Information Included in the Fine Print

Most people are concerned with a few key areas of a loan such interest rate and length of the loan, but it is within the fine print of the promissory note or security agreement that contains the information that can really cost you money. The most common information included throughout the text will include:

  • The promise you make to pay the lender a certain amount of money plus the agreed to interest rate.
  • Whether the interest rate is fixed or variable; if variable, when does the rate change and by how much.
  • The payment schedule.
  • Charges for late payments.
  • Any applicable grace period.
  • If the loan can be paid off early and if any penalties are incurred for doing so.
  • Whether or not security or collateral is require.
  • Whether or not the loan can be extended.
  • What happens if you default.
  • What happens if you pay with a bad check.
  • Can the lender take money from other accounts you may have with them to repay the loan.
  • Who pays legal fees and collection costs.

Don’t Sign Anything Until You Completely Understand

While it pays to make sure you get a good interest rate with good terms it is equally important to make sure you understand everything about the loan even if you don’t think it will ever apply to you. You have nobody to blame but yourself if you make a late payment and find out there is a $40 late fee. It would come as no surprise if you took the time to understand what you agreed to. In the event of a problem with your account ignorance is not a defense. It may seem like a waste of time to spend an extra ten or fifteen minutes to read multiple pages of small text, but it could end up saving you money or problems somewhere down the line.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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