What to check first
Start with the clauses that determine total cost and what happens if payment is late.
- Principal, interest rate, compounding, fees, payment schedule, and maturity date.
- Late fees, default interest, grace periods, and cure rights.
- Acceleration, demand repayment, cross-default, and lender discretion.
- Collateral, security interests, liens, personal guarantees, and co-signers.
- Prepayment, collection costs, attorney fees, governing law, and dispute terms.
Common loan red flags
The riskiest clauses often matter only when something goes wrong.
- Loan is payable on demand even if you expected fixed installments.
- Any small breach lets the lender accelerate the full balance.
- Personal guarantee or collateral language is broader than expected.
- High default interest, compounding fees, or collection cost shifting.
- No right to prepay or a large prepayment penalty.
Before you sign
Make sure the legal terms match the repayment plan you think you agreed to.
- Calculate total repayment under normal, late, and default scenarios.
- Confirm exactly what property or personal assets are at risk.
- Ask for written grace periods and cure rights if cash flow may vary.
Loan agreement FAQ
What is acceleration in a loan agreement?
Acceleration lets the lender demand the entire outstanding balance after certain events, often a default.
What is a personal guarantee?
A personal guarantee makes a person responsible for repayment even if the borrower is a company or another party.
Can I repay a loan early?
Only if the agreement allows it without penalty. Check prepayment rights, fees, and interest calculations.
What is default interest?
Default interest is a higher rate that applies after default. It can increase the total cost quickly.
Should informal loans still be written down?
Yes. Written terms can reduce confusion about amount, interest, due dates, default, collateral, and forgiveness.