Contracts Regarding Loans
The customer has never had so much choice when it comes to applying for a loan. From bridging loans to personal loans, secured or unsecured, and from online loans to banks, building societies, and high street lenders, the amount of choice can seem bewildering. One factor that will be common will be the loan contract and the all important terms and conditions.
Loan Contracts and ProtectionContracts are not only useful to set down the requirements, obligations and expectations of both parties; they are also a vital form of protection. Regardless of whether the loan is secured or unsecured, the terms and conditions are regulated by the Consumer Credit Act 1974. This offers much protection for the consumer and details should be outlined in the loan contract verifying that the lender has a licence to trade.
By signing a loan contract the customer is signing a contract of credit with the lender. The terms and conditions may be standard for all customers but there will be clauses specific to the individual loan. These will include the amount of the loan, repayment terms and the annual percentage interest rate. The contract should also include details of the customer's rights, and any contract that attempts to include clauses that overrides these rights may be deemed unenforceable in a court of law.
What is Included in a Loan Contract?There will be a number of statements in any contract and these are known as the terms and conditions. It cannot be stressed enough that these terms and conditions should be read thoroughly. The terms will be dependant on the loan and the customer but common clauses will include:
- The names and addresses of both parties.
- The annual percentage rate.
- The amount of the loan.
- Repayments and frequency of the loan.
- The purpose of the loan.
- The length of the repayment period.
- Details on penalties for early repayments.
- Type of loan; for example, secured or unsecured.
- Information on missed payments and defaults.
Standard Loan ContractsOnce a customer has decided on the type of loan and has agreed to the terms and conditions then the last step is to sign and date the contract. For many customers a quick scan of the contract is all that will be undertaken. By doing this the customer is seen to have read and agreed to the contract's terms and conditions, even if they have not thoroughly read the full contract.
Most contracts are standard but there will be terms and conditions specific to each individual customer. For example, if a customer has a bad credit rating they may have been offered a loan with a higher annual percentage rate (APR) than that offered to customers with a good credit rating. It is important to check all of the terms and make sure that they are clearly defined and understandable.
Payment Protection InsuranceCustomers who enter into loan agreements will usually be offered payment protection insurance (PPI). The customer should decide whether or not this is actually worth the money and whether they think they will use the protection. There has been much controversy over unfair practices from lenders where PPI is concerned. PPI is never compulsory and there should be a box that is to be ticked on the contract to say whether or not PPI is required.
Undue InfluenceCustomers should never be unduly influenced regarding PPI or for that matter any of the terms and conditions. If any influence is used, for example, a salesperson making it known that a customer might not receive the loan if PPI is not taken, then the contract may be unenforceable in a court of law.
Credit ScoringThe lender's policy regarding passing on customer information should be noted in the contract. Lenders will pass on information to credit agencies if a customer defaults or misses loan payments. But bad credit scores from lenders can actually happen before signing any contract. When looking for a loan do not fill in a loan application; ask for a quote. If a lender asks to undertake a credit search when asking for a quote, refuse. Only accept when you are happy to apply for the loan, otherwise rejected loan applications will be recorded by credit agencies.
No matter the amount of choice available to customers looking for a loan, the loan contract will always be an important part of the deal. It governs the customer's consumer rights and protection. This document is an important point of reference if any future dispute over the loan does occur at a later date.