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Understanding credit agreements

Whether you are looking for a personal loan, a credit card, or financing for a major purchase, it is important to understand the details of your credit agreement. Serving as legally binding contracts between borrowers and lenders, credit agreements set up the terms and conditions that govern loans and credit products.

Credit agreements supply important details like:

  • the amount you need to pay back
  • due dates for payments
  • any penalties or fees that may apply if you miss a payment or default on the loan

Common terms in a credit agreement

When reviewing a credit agreement, pay special attention to details like: 

Interest rate: The interest rate is a critical part of any loan. Interest rates can be fixed or variable. A fixed interest rate stays constant throughout the loan term, while a variable rate can change during the loan term, due to market changes. The rate you are offered may depend on your credit history, the type of loan, and the lender.  

Loan term: The loan term is the period in which the lender and borrower are bound by the contract. At the end of a loan term, the lender and borrower may renegotiate the terms and conditions of the credit agreement, or the borrower may pay off the remaining balance to the lender.

Amortization period: The amortization period is the total length of time it will take to pay off the loan in full, including principal and interest, based on the current loan agreement terms and conditions. The period may be longer or equal to the loan term. The amortization period can be renegotiated after the loan term ends and may change if you make added payments on your loan before the end of the amortization period.  

Repayment period: The repayment period is the amount of time you have to repay the loan. Each type of loan will have its own repayment terms. Depending on the type of loan, the repayment period may:

  • have deferment options (such as a student loan) where you don’t have to start repayment for a set period
  • end on a specific maturity date (like in a mortgage loan) so when your term is up you either need to renegotiate or pay off the lender in full

Fees and charges: On top of the interest rate, some loans may include other costs such as application fees, origination fees, late payment fees, annual fees, or early repayment penalties. The specific fees and their amounts can vary between lenders and the type of loan agreement.

Payment structure: The payment structure outlines the amount of your payments and the payment frequency (monthly, bi-weekly, etc.), including how they are calculated. It’s important to understand your loan payment structure to make sure the payments fit within your budget.

Default conditions: If you default on the loan (are not able to make payments) the default conditions describe the circumstances under which the lender can demand repayment of the loan and the steps the lender can take to collect the debt.

Total amount payable: The total amount payable is the amount you will have paid by the end of your loan term, including interest and any applicable fees.

Loan type: Different types of loans have different features and requirements (lines of credit, payday loans, mortgage, auto loans etc.). Make sure you understand the type of loan you are signing up for and how it works.

The importance of reading the fine print

Don’t rush the process when applying for a credit card or loan. Instead, take time to read the fine print. Your credit agreement will help you understand the total cost of the credit you are applying for and help you avoid any surprises. Carefully reviewing the terms and conditions and comparing offers from multiple lenders can help you choose the best lender for your needs. Ensure that any verbal agreements, promises, or conditions are clearly written in the credit agreement. The lender or borrower is not legally bound to fulfil any promises not included in the contract.