6 min read

Loans: the small print

Andre Spiteri
3 February 2017

Is it really worth reading the small print on a loan? We talk about why you could be making a mistake by skim reading those all-important T&Cs.

Whatever kind of loan you apply for (and for whichever reason) one thing’s for sure - it’ll have a whole lot of strings attached. Your lender is going to give you a sizeable chunk of money, after all. So you, the borrower, are going to have to stick to its rules.

Unfortunately, while the necessity of reading through your loan agreement’s fine print might seem obvious, a shocking 84% of Brits don’t do it.

You could be making a huge mistake.

Sure, terms and conditions don’t exactly make for riveting reading. But if something goes awry, you can’t expect to get out of it by saying you didn’t know, can you?

So if you’d rather read War and Peace cover to cover than your loan’s terms and conditions, this is for you. Here’s a beginner’s guide to your loan’s fine print and the most important things to look out for.

Why read your loan’s terms and conditions?

When you sign your loan agreement, you’re legally bound by the fine print. Breach the terms, and you risk losing your possessions (the car you’ve dreamt of for so long, for instance) and damaging your credit score.

Besides, failing to read the fine print can leave you feeling frustrated or even ‘cheated’ when you’re faced with unexpected charges or penalties. Complaining to your lender won’t get you anywhere. All applicable fees and charges are in the agreement, black on white. By signing, you’ve confirmed you’ve read and understood them.

With this in mind, you really owe it to yourself to understand what you’re getting yourself into.

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What’s in my loan’s Ts & Cs?

Your loan’s terms and conditions protect you by giving you the essential information you need to stay away from financial trouble. In particular, they include a detailed list of all applicable charges - initial fees, ongoing fees and penalties - and information on when they apply. Understand them, and you’ll save money and avoid damaging your credit score.

Terms and conditions will vary from lender to lender; you should read them carefully before you sign. That said, here are some of the most common terms you might come across whilst going through your loan’s fine print.

Annual Percentage Rate (APR)

When you take out a loan, your repayment includes the amount you’ve borrowed plus interest on top. Interest is the “price” of borrowing money and it’s called the APR.

The APR is the amount of interest you’ll pay on your loan. It’s not to be confused with the ‘representative APR’ on lenders’ marketing materials.

A representative APR is the typical rate a lender offers to at least 51% of its borrowers. However, the actual rate you’re offered will depend on various factors, including your credit score. Typically, the better your credit score, the lower the APR you’ll have to pay. The lower your credit score, the higher your APR.

Secured or unsecured?

Whether your loan is secured or unsecured depends on a number of factors, including the amount you’re borrowing and your credit score.

If your loan is secured, you’ll need to put up one of your possessions as collateral. Your lender has the right to take this away should you default. Conversely, an unsecured loan means you’re lent money without having to put anything up as collateral. The flipside is that unsecured loans usually have higher interest rates and shorter repayment terms.

What conditions should I look out for?

Even if you don’t read every single word, it’s important to be aware of the following conditions:

Terms of default

This section outlines what happens if you miss a repayment, pay late or stop paying your loan altogether. Spoiler alert: at the very least, you’ll incur fines and additional interest. If your loan is secured, you may also lose your collateral.

Early repayment

As incredible as it sounds, you may also face charges if you pay off your loan before the end of the term.

Most lenders get the money for your loan by taking out loans themselves. If you repay your loan early, they’ll still have to repay their loans, which eats into their profits or, potentially, could even result in financial losses. An early repayment fee covers this risk.

Lenders can also demand early repayment themselves. Most often, they reserve this right if it turns out that you’ve intentionally given incorrect information on your application or if you’re more than 14 days late with your repayments.

Repayment holidays

Some lenders may make their loans more attractive by offering ‘repayment holidays’ - a short break from repayments for a specific time period. While this may sound great, do beware, as you may still be charged interest and could end up paying more in the long run.

Set-off

If you hold other accounts with your lender, your lender can - and usually will - reserve the right to take money out of your other accounts to pay off any late repayments. You’ve been warned.

Of course, if you’re thinking of applying for a loan, your credit score is crucial. Click to look at your latest score and credit report for free.

by Andre Spiteri

Andre is a former lawyer turned financial writer. Andre has written this article especially for ClearScore.

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