- Never sign an agreement or contract that you don't understand. Instead, take your time and read through it again or ask someone to explain what the terms mean.
- Signing a loan agreement says yes to certain terms in exchange for the money. If you don't fully understand what these terms are, you could be tying yourself up in unfavorable terms without realizing it.
Credit agreements and loan terms can be confusing or baffling to many people – and for a lot of reasons. Sometimes it's a single word that you're stuck on, while other times the entire contract might just as well be written in Klingon. If you're a first-time lender or English isn't your first language, you could also be confused by contract terms.
Here are some of the most important credit and loan-related terms defined for anyone who isn't sure what they're looking at.
#1: Credit Agreement
When your loan gets approved, you're usually sent a credit agreement: This is the contract that outlines (1) the loan amount, (2) the loan interest rate or amount, (3) the initiation fee, (4) the loan installment and an other information regarding your loan that you are agreeing to when you sign (or click “I Agree and Accept”).
Always file credit agreements in a safe place where you can refer back to them later. (Yes, even where loans have already been paid.)
Loan companies and banks will usually talk about your eligibility before they grant you a loan. In short, this means, “Can this person meet the payment terms as the agreement outlined?” Your eligibility is calculated by taking a closer look at factors like your credit score.
Companies will usually show you a quote before showing you the longer, final credit or loan agreement. The quote outlines the same terms as the credit agreement, but as a preliminary look at what they can offer you. When you accept a quote, you're taken to the loan agreement that shows you the same information with much more detail.
#4: Credit Score
Your credit score helps to tell a loan company whether you are high-risk or low – and, generally, what you do with your money. Things like early or late repayments and your general level of financial responsibility will all impact your credit score and how financial institutions view you as a risk.
#5: Credit Check
When someone looks up information from a credit bureau in regards to a credit score, this is called a credit check. It outlines your credit score – and says more about your financial standing. Companies other than loan providers (such as estate agents) also make use of credit checks, but have to ask your permission to do it.
In the language of loan agreements, an installment refers to the amount you will pay in order to settle the loan balance. Some loans are split into many installments, such as over a 12 or 24 month period, while some loans like instant loans are paid in one or two installments that cover the whole amount.
For example, if you're paying R550 per month over three months for a R1, 000 loan, it means that you're paying a R550 installment – and technically, you're paying back the total of R1, 650. (Why is it more than the original amount you borrowed? That's called interest, and it's why you should always check and understand your loan agreement!)
#7: Initiation Fee
An initiation fee is usually added to your loan amount, and paid along with the “initiation” of your loan. It's calculated in with the total loan amount and should always appear both on your quote and credit agreement. Be careful of loan providers demanding money upfront and claiming that it's an initiation fee – that's not how they are meant to work.
#8: Principal Debt
The principal debt (also sometimes calls principal amount) is the loan amount that you start with. That's the one you are asking for when you apply for a loan, minus added costs like initiation fees and interest. If you apply for and receive a R2, 000 loan, your principal debt stands at R2, 000. Anything that you pay above this amount is interest.