How to Read a Loan Agreement, Section by Section

Most people sign a loan agreement after reading two things: the monthly payment and the place to sign. The rest of the document decides what happens when a payment is late, when you want to pay early, when you change banks, and when you and the lender disagree. Those are exactly the moments when it’s too late to read it.

Agreements differ by lender, product and state, so yours won’t follow this order exactly. But most consumer installment loans, whether a personal loan, a car loan or a credit union loan, contain some version of every section below. Use this as a map.

The Truth in Lending box

Near the top, often in a ruled box, you’ll find the disclosures required by the Truth in Lending Act. Federal rules require them to be set apart from the rest of the contract, with the APR and finance charge more conspicuous than the other terms, and they’re the fastest way to compare one loan with another. Four figures matter most, and the regulation requires each to carry a short explanation like the ones below.

Annual percentage rate (APR)

“The cost of your credit as a yearly rate.” Unlike the interest rate alone, the APR folds in certain fees, such as an origination fee, so two loans with the same interest rate can have different APRs.

Finance charge

“The dollar amount the credit will cost you.” Interest plus certain fees, over the whole loan, assuming you pay on schedule.

Amount financed

“The amount of credit provided to you or on your behalf.” If a fee is deducted from your loan, this is less than the loan amount you applied for.

Total of payments

“The amount you will have paid when you have made all scheduled payments.” For a purchase financed by the seller, such as a car, you’ll also see a total sale price that includes your down payment.

Interest rate18%

Estimated APR23.36%

Cost of borrowing$1,241

• You receive $4,750
• Fee $250 (5%)
• Interest $991

Total repaid: $5,990.87 in 24 payments of $249.62.

A quick check: the total of payments should equal the amount financed plus the finance charge. If it doesn’t, ask why. Our guides to APR vs. interest rate and origination fees go deeper on how fees change the picture.

Payment schedule

The disclosures also list the number of payments, the amount of each, and when they’re due. Check three things here:

• The first due date. It may be sooner or later than a month after signing.
• Whether every payment is the same. A final payment much larger than the others is a balloon payment, and you need a plan for it.
• Whether the payment includes anything besides principal and interest, such as optional insurance premiums.

Late fees, grace periods and returned payments

The disclosures must state any charge for paying late. The body of the agreement usually explains when it applies: a late fee may kick in a set number of days after the due date (a grace period), or immediately. The amount may be a flat dollar figure, a percentage of the payment, or the greater or lesser of the two. Many states cap late fees on consumer loans, and the caps vary.

Look separately for a returned-payment fee, charged when a payment bounces. If you pay by automatic debit, a single failed payment can trigger a returned-payment fee from the lender, an insufficient-funds or overdraft fee from your bank, and a late fee, all at once. Knowing those amounts in advance helps you decide how much cushion to keep in the account.

Autopay authorization and how to revoke it

Many lenders ask you to sign an authorization letting them debit your bank account each month, often in exchange for a small rate discount. That can be convenient. Here’s what federal rules under Regulation E generally say about it:

• It usually can’t be a condition of the loan. A lender generally can’t require you to repay by preauthorized electronic transfers in order to get credit. Overdraft lines of credit are an exception. Offering a lower rate for choosing autopay is common and generally allowed.
• You can stop it through your bank. You can tell your bank or credit union, by phone or in writing, to stop a preauthorized debit at least three business days before it’s scheduled. The bank may ask you to confirm in writing within 14 days; if you don’t, a phone request may stop being binding.
• Tell the lender too. The CFPB suggests notifying the company that you’re withdrawing permission, then notifying your bank, following up both in writing and keeping records. Debits the company makes after you’ve revoked authorization can be disputed as errors with your bank.

Prepayment

Truth in Lending disclosures must say plainly whether you’ll pay a penalty if you pay the loan off early, and whether you’d be entitled to a refund of part of the finance charge. Many personal and auto loans have no prepayment penalty, but don’t assume. Also look for how interest is calculated. With simple interest, paying early saves interest you haven’t yet been charged. Loans with precomputed interest calculate it upfront, so paying early may save less.

Default and acceleration

The default section defines what counts as breaking the agreement. Missing a payment is the obvious one, but agreements often list others: giving false information on the application, letting required insurance lapse on collateral, filing for bankruptcy, or the death of a borrower.

Nearby is usually an acceleration clause. It lets the lender declare the entire remaining balance due at once after a default, rather than just the missed payments. Some states require lenders to send a notice and give you a chance to catch up before accelerating or repossessing, and the details vary. Read what your agreement says about notice, and whether the lender can charge collection costs or attorney fees.

Collateral and security interests

If the loan is secured, the agreement and disclosures will say what the lender has a security interest in: a car title, a savings account, or other property. If you stop paying, the lender may be able to take that property, in some cases without going to court, depending on state law.

Two things worth reading closely:

• Cross-collateral clauses. Some agreements, especially at credit unions, say the collateral for one loan also secures your other loans with the same lender. That can mean you can’t get your car title back after paying off the car loan while you still owe on another loan there.
• Household goods. The FTC’s Credit Practices Rule bars many lenders from taking a security interest in ordinary household goods unless the loan was used to buy them. If an agreement lists your furniture or appliances as collateral for an unrelated cash loan, ask questions.

Arbitration and class-action waivers

Many consumer loan agreements require that disputes go to private arbitration instead of court, and many include a class-action waiver, meaning you agree not to join a group lawsuit against the lender. These clauses are generally enforceable. A 2017 federal rule that would have limited class-action waivers in many financial contracts was overturned by Congress before it took effect.

Some agreements let you opt out of arbitration by sending written notice within a set number of days after signing. If yours does, the instructions will be in the arbitration section; note the deadline. Members of the military and their dependents covered by the Military Lending Act have extra protection: for loans covered by that law, lenders can’t require arbitration.

Electronic consent

If you’re signing online, you’ll usually be asked to agree to receive documents electronically. Under the federal E-SIGN Act, before you consent the lender has to tell you, among other things, whether you can get paper copies, how to withdraw consent, and what hardware and software you’ll need. Your consent has to be given in a way that shows you can actually open the electronic format they’ll use.

Practical point: download and save a copy of the signed agreement and disclosures on the day you sign. If the lender’s portal changes or you lose access, you still have your contract.

Cosigner notice

If someone is cosigning, the FTC’s Credit Practices Rule generally requires the lender to give them a separate written notice before they become obligated. Among other things, it warns that they may have to pay the full debt if the borrower doesn’t, that the lender may be able to collect from them without first trying to collect from the borrower, and that a default may appear on their credit record. A cosigner should read the whole agreement, not just the notice, because their obligation is the same as yours.

Find these five numbers before signing

If you only have ten minutes with the document, find these and write them down:

• APR. The yearly cost including certain fees. Compare it with every other offer you have.
• Amount financed. What you’ll actually receive or have paid on your behalf. Is it what you need?
• Total of payments. Everything you’ll pay if you make every payment on schedule.
• Monthly payment and number of payments. Confirm none is a balloon.
• Late fee and returned-payment fee. Including how many days you have before a late fee applies.

Then check one yes-or-no: is there a prepayment penalty?

A lender that won’t give you time or a copy to read before signing is telling you something. Our lender check covers that and other warning signs, and the offer comparison worksheet lines up the five numbers across up to three offers.