What is a Personal Loan Agreement & Why it is Important?
A personal loan agreement is the one which specifies the clause for your personal loan. The clause is set by the lender and by signing on it you agree with each term & condition for the entire tenure period.
Normally people think that signing a personal loan agreement is a formality to get approved for a personal loan. And it only includes the loan amount, interest rate and the duration for which borrowing is taking the loan. But the fact is a personal loan agreement is much more than this.
It includes clauses such as what actions can be taken against you in case of default and non-payment towards your personal loan. It also includes what amount will be charged as a penalty against you in a certain case. The date by which the amount/EMI needs to be paid to the bank is specified in the agreement as well.
All these clauses vary from lender to lender and being not aware of it and signing the loan agreement without knowing can cause serious trouble for you in the future.
Let’s now discuss the clauses of a personal loan agreement in detail.
Clauses of a Personal Loan Agreement
- The borrower agrees that all the documents given as details or as KYC document are genuine and the bank should rely on that to approve their loan agreement.
- The lender has all the right to decide the eligibility criteria for Loan as per their policy and guidelines which you need to fulfil in terms to get approved for your personal loan.
- The personal loan agreement includes the Interest Rate on which your loan has been approved. So, it becomes very important to check for the interest rate which you are going to pay. Don’t predict or be confused about the interest rate being charged, believe only when you have written confirmation. Checking the documents carefully will clear all your confusion and doubts.
- The agreement also contains the duration on which the interest rate is calculated, generally, it is being calculated on a yearly basis.
- Loan tenure is the time period in which you are going to repay the entire loan along with the interest rate. This particular time period is mentioned in the loan agreement and hence it becomes very important to check for this.
- Free Look Period – This is one of the most important which the borrower should know. In case the borrower disagrees with any of the terms of Loan, or in case he/she is not willing to have the loan, then there is an option given to the borrower to cancel the Loan within two days of disbursement. Their full amount should be as it is present in the borrower’s account so that the lenders can get it back. The Loan account will accordingly be cancelled by the lender and the total amount will be debited from Borrower’s Savings account which was credited as the loan amount.
- This facility is only available with few lenders, so in terms to get this facility you have to check your loan agreement document thoroughly before signing it.
- The personal loan agreement also includes the amount which you will be paying monthly as the EMI towards your borrowing. To be clear about the amount it is required to check your loan agreement and then only sign.
- Lock-in period -For Pre-payment different lenders have different policies and to know yours you should read your loan agreement carefully. With most of the lenders, the borrower cannot foreclose the Loan or make pre-payments till 12 months.
- Pre-payment penalty – Borrowers may be allowed to foreclose or to prepay the loan amount after 12 months but against some fees. This fees which lenders charge against prepayment and pre-closure is known as pre-payment penalty. Before signing the loan agreement you must know how much you are going to be charged in such a situation.
- In the case of Default – Future is totally unpredictable and you can’t say that you can never default with your EMIs.
- In case of default (when the Borrower fails to pay the Loan), lenders charge some particular amount as the penalty. Being a borrower one should always be aware of those penalties and how much is that. When you sign your loan agreement you agree to pay how many penalties they have mentioned there.
By signing the loan agreement borrower commits to all the above-mentioned Terms of Agreement, and once it is done no changes can be made. So, it is very important to understand your personal loan agreement completely before you sign it.