Unsecured Personal Loans - Beware of the Fine Print

Unsecured Personal Loan Contracts - Beware of the Small Print

Last Updated: May 26, 2010

An Unsecured Loan is a loan that is not backed by collateral. These loans are also referred to as Personal Loans or Signature Loans. Unsecured loans can be based soley on the borrower's credit rating. As a result, they are much more difficult to obtain than a Secured Loan.

There are three types of Unsecured Loans:

First there is a personal unsecured loan, meaning a loan that you individually are responsible for the repayment of.
Second is an unsecured business loan which leaves the business responsible for the repayment.
Finally there is an unsecured business loan with a personal guarantee. With the latter, although the borrower is the business, you as an individual will be the payer of last resort if the business defaults on the loan.

If you are currently shopping for an unsecured personal loan, you should know that other than the interest rates, you should also be looking into the documents you will have to sign when you finally get your loan. Most contracts for unsecured loans contain provisions in small print that many borrowers take for granted and do not bother to read at all. Learn what you should be looking for in the small print provisions and do review the loan documents while you're still shopping and not when you're ready to sign them before the loan release. This way, you can be assured that you're getting the best possible terms for your loan. Lenders usually include in the small print their provisions covering loan insurance, penalties on prepayments, and adjustments on APR (annual percentage rate).

Penalties on Prepayment

The means the lender will charge you a fee if you pay off your loan before the agreed term. While this is not especially common for unsecured loans, it is a requirement on secured mortgage loans. The fee is basically a penalty for your prepayment and is meant to compensate the lender for the additional interest income it would have earned had you kept the loan outstanding until the agreed term.

Some lenders may not be clear about their policy on prepayment but try to look for it in the small print section of the loan contract. You can always look for a loan provider that does not charge prepayment penalties or at least go with the lender that charges the least in penalties.

APR Adjustments

Another common policy in small print is the adjustment on APR. This type of loan was dubbed a "sub prime" loan in the mortgage industry and is one of reasons the houseing market blew up.

Many lenders advertise a certain APR but this is usually given only to highly favored customers. So if your credit is less than perfect, expect a higher APR for your loan and any adjustments on your interest rate are customarily written in small print. By law, lenders are required to inform borrowers about their APR before signing any loan documents and by practice, lenders do so by putting them down in the small print section of the contract. Your signature on the same document signifies your knowledge of the APR you will have to pay. Therefore, you must read the small print to know how much they are charging you.

Loan Insurance

Loan insurance is not common on unsecured personal loans, but it does occur. In rare occasion lenders require loan insurance to cover your payments in case you cannot pay your loan because of injury or loss of employment. The insurance premiums are usually added to the loan payments you have to make.

There is no doubt that loan insurance will help protect your credit in case of adverse developments but you need to be concerned about its added costs to you. Know that lenders and the insurance company they endorse are normally affiliated and the insurance they're tacking in your loan is usually not the best offer you can get. Know also that you are not required to buy your insurance through the lender. You can shop around so you can get the best loan insurance deal you can find. However, you should shop for your insurance before getting your loan so you won't be forced to accept the lender's insurance when the time comes.

The only way you can avoid the usual small print tricks lenders use on unsecured personal loans is by asking lenders for a copy of their loan contract when you're still shopping. It should not be a problem for lenders to provide you with a copy of their standard contract. Do remember that the APR a lender will charge you is not going to be in the contract yet. You will get that information before you sign the document but at least, you'd know where to look for it.