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Questions to Ask Before Signing a Loan Agreement
by
JG Wentworth
•
September 23, 2025
•
5 min
Signing a loan agreement is a significant commitment that can shape your financial life for years. Once the ink is dry, you are legally obligated to meet every term in the contract. That is why it is essential to understand exactly what you are agreeing to before you move forward. Too often, borrowers focus on the size of the monthly payment without considering other details that affect the true cost and flexibility of the loan. Taking the time to ask the right questions can help you avoid unexpected costs and choose an arrangement that works for you.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
Understanding the Total Cost
The interest rate is usually the first number people notice, but it does not tell the full story. Many lenders also charge origination fees, processing charges, or other administrative costs that can add hundreds or even thousands of dollars to the total repayment. To get the clearest picture, request the annual percentage rate, or APR, which combines the interest rate with most fees into one figure. Ask for a repayment schedule showing the total amount you will pay over the life of the loan. Seeing both the monthly and total cost will help you compare offers accurately.
Fixed Rate or Variable Rate
Knowing whether your loan has a fixed or variable interest rate can make a big difference in long-term planning. A fixed rate means your payment will stay the same from start to finish, which can make budgeting easier. A variable rate may start lower but can change based on market conditions. If the rate can change, find out how often adjustments occur, what index it follows, and whether there is a maximum cap to protect you from steep increases.
Repayment Terms and Timing
The structure of repayment matters just as much as the amount you owe. Clarify when your first payment will be due and whether you can adjust the due date to match your income schedule. Ask if there is a grace period for late payments and how additional payments are applied. Some lenders apply extra funds to the principal, which can save you money on interest, while others may apply them to future installments.
Loan Term Length
The length of your loan affects both your monthly budget and the overall cost. Shorter terms usually mean higher monthly payments but lower total interest paid. Longer terms may offer lower monthly payments but result in more interest over time. Reviewing side-by-side examples of different term lengths can help you decide which structure fits your needs best.
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Prepayment and Early Payoff Rules
Paying off a loan early can save money on interest, but some agreements include prepayment penalties that reduce or eliminate those savings. If there is a penalty, make sure you understand how it is calculated. Also, ask whether you can make additional principal payments without triggering a fee.
What Happens if You Miss a Payment
Even the most careful borrowers can face unexpected setbacks. Understanding the lender’s late payment policy is essential. Ask if they charge late fees, raise your interest rate, or report the missed payment to credit bureaus. Inquire about hardship options in case your circumstances change, such as payment deferrals or temporary adjustments.
Secured or Unsecured
Some loans require collateral, such as a home or vehicle, which the lender can take if you default. These are called secured loans. Unsecured loans do not require collateral but may have higher interest rates. If your loan is secured, be clear about exactly what asset is at risk.
Impact on Your Credit
Find out whether the lender reports to all three major credit bureaus and how quickly payment history appears on your report. Missed or late payments can damage your credit score, while consistent, on-time payments can help build it. Also, ask whether the application will involve a hard credit inquiry, which may cause a temporary dip in your score.
Lender Reputation
The terms in writing matter, but so does the lender’s track record. Research reviews, check for complaints with the Better Business Bureau, and see how responsive they are to customer questions. A lender that is difficult to work with can turn even a fair agreement into a frustrating experience.
Reviewing the Agreement in Advance
If possible, request a copy of the loan agreement before you are expected to sign. This gives you time to read the fine print without pressure. Pay special attention to sections about fees, repayment terms, default conditions, and dispute resolution. If anything is unclear, ask for clarification before committing.
Final Thoughts
A loan can be an effective financial tool, but only when you fully understand the terms. By asking clear, targeted questions and reviewing the details with care, you can protect yourself from unpleasant surprises and choose an arrangement that supports your goals. Taking the extra time to investigate before signing can save you from years of financial strain later.
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