Why these terms matter

Loan documents are legally binding. Missing one clause can change your monthly payment, increase your total cost, or give the lender new rights (for example, to seize collateral or accelerate the balance). The Consumer Financial Protection Bureau recommends reviewing loan terms closely and asking for plain-language explanations before signing (CFPB).

Key terms to read and how they affect you

  • Interest rate and APR: Know whether the rate is fixed or variable, and always check the APR. The APR includes some fees and gives a better picture of total borrowing cost. For adjustable rates, ask about the index, margin, rate caps, and how often the rate can change.

  • Loan term and amortization: The length of the loan affects monthly payments and total interest. Ask for an amortization schedule so you can see how much of each payment reduces principal versus interest.

  • Monthly payment and total repayment: Don’t focus only on the monthly amount. Multiply the payment by the number of payments to estimate total paid over the life of the loan.

  • Fees and costs: Look for origination fees, application fees, late fees, NSF fees, and any prepayment penalties. Ask which fees can be financed into the loan versus paid upfront.

  • Collateral and security interest: If the loan is secured, the contract will identify the collateral and describe the lender’s rights on default. Understand how repossession or foreclosure works and the lender’s right to sell collateral.

  • Default, acceleration, and remedies: Read the default triggers (missed payments, breaches of representations, cross-default clauses) and what the lender can do—charge default interest, call the loan due, repossess or foreclose. See our deeper explanation on default interest rates: Default interest rates and how they’re calculated.

  • Prepayment and yield-maintenance clauses: Some contracts penalize early payoff. For mortgages and business loans this can be significant—confirm whether a prepayment penalty, yield-maintenance, or defeasance clause applies.

  • Escrow or impound accounts (mortgages): Check whether property taxes and insurance are collected through an escrow account, how it’s calculated, and how surpluses or shortages are handled. For mortgages, see: How Escrow Accounts Work.

  • Covenants and cross-default terms (business loans): Commercial loans often include financial covenants (debt-service ratios, restrictions on additional debt). Violating a covenant can trigger default even if payments are current.

Red flags to watch for

  • Broad default definitions (e.g., a single technical breach triggers acceleration).
  • Variable-rate loans without clear caps or adjustment frequency.
  • Negative amortization or payments that don’t reduce principal.
  • Vague fee language such as “reasonable attorney fees” without limits.
  • Cross-collateralization that ties multiple assets to one loan.

Practical checklist before you sign

  1. Request a plain-language summary or ask the lender to highlight the key terms in writing.
  2. Ask for a full amortization schedule and an example showing the first year of payments.
  3. Compare the APR and fees across at least two offers.
  4. Confirm whether the loan can be prepaid without penalty and how interest is calculated if you prepay.
  5. Have an attorney review commercial loans or complex clauses (covenants, defeasance, subordination).
  6. Keep a copy of all disclosures and the signed contract.

In-practice note

In my 15 years advising clients, I often see borrowers agree to an attractive monthly payment without checking the rate structure or hidden fees. Asking for an amortization schedule and an explanation of all fees typically uncovers higher long-term costs or risky clauses.

Additional resources

Professional disclaimer: This article is educational and not individualized financial or legal advice. For personalized guidance, consult a licensed financial advisor or attorney before signing any loan contract.