Reading a Loan Agreement — A Borrower's Checklist.
The Argument for Reading It
Most personal-loan agreements in Canada run between eight and twenty pages. They are written in a register that is neither difficult nor accessible — somewhere between legal language and consumer-friendly prose, which produces a text that most borrowers skim, sign, and file. The result is that many borrowers do not actually know the terms to which they have agreed, and they discover those terms only when something unexpected happens — a missed payment, an early repayment, a sale of the loan to a different servicer.
A Meridian specialist will walk through the agreement with you before you sign. This piece is what we would talk through. Twelve items, in the order they typically appear in the document. The list is not exhaustive but it covers the questions that most often produce regret later.
I. The Principal
The principal is the amount the lender is advancing to you. Confirm the figure matches what you asked for and what the specialist quoted. If origination fees are being deducted from the principal — that is, if you applied for $30,000 but only $29,100 will arrive in your account — confirm the net advance figure in writing and confirm whether interest accrues on the gross or the net amount. (It is usually the gross.)
II. The Interest Rate
Confirm the stated annual rate. Confirm whether the rate is fixed for the entire term or variable. If variable, confirm the benchmark to which it floats — usually prime, occasionally a Bank of Canada policy rate — and confirm the margin above the benchmark. A common form: “Prime plus 4.50 percent.” If prime is currently 5.95 percent, your current rate is 10.45 percent, and it will move with prime.
III. APR Versus Nominal Rate
The nominal rate is the headline figure. The annual percentage rate (APR) is a regulated figure that includes both the nominal rate and the fees the lender charges for originating the loan, expressed as a single annual percentage. APR is the apples-to-apples figure for comparing loans across lenders. If a loan’s nominal rate is 9.5 percent but its APR is 10.8 percent, the gap is the cost of origination expressed as an annualised rate. The APR must be disclosed under Canadian regulation. Read it.
IV. The Term
Confirm the length of the loan in months and confirm the maturity date. A “sixty-month loan” signed today matures sixty months from the first payment date, not from the signature date. If the first payment date is thirty days from now, the maturity is sixty-one months from signature.
V. The Payment Schedule
Confirm the monthly payment amount. Confirm the payment date — usually a fixed day of the month, sometimes the day-of-month that the loan funded. Confirm the channel — usually pre-authorised debit (PAD) from your primary bank account. Confirm what happens if the payment date falls on a weekend or holiday: most agreements specify it is taken on the next business day, but some take it on the previous business day.
VI. The Total Cost of Capital
The total cost of capital is the sum of all payments you will make over the life of the loan, minus the principal. It is the dollar figure for interest plus fees, paid over the term, in nominal dollars. For a $30,000 loan at 9.5 percent over sixty months with no fees, the total cost is roughly $7,615.
This figure may or may not appear in the agreement explicitly; if it does not, ask your specialist for it in writing before signing. It is the number that matters in the long run — far more than the headline rate.
VII. Prepayment Terms
Prepayment is the right to pay the loan off, in part or in full, before its scheduled maturity. Some agreements allow prepayment at any time without penalty. Others charge a prepayment penalty — often expressed as three months’ interest, or two percent of the prepaid amount, whichever is greater.
Confirm whether prepayment is permitted at all, whether there is a penalty, and what the penalty is. If you anticipate paying the loan off early — say, with a year-end bonus or a real-estate sale — this is a material clause.
VIII. Late Payment Terms
Confirm the late-payment fee. Confirm whether late payment also triggers a rate increase. Some agreements include a “default rate” — a substantially higher interest rate that applies if the borrower is more than a certain number of days late. The default rate is sometimes only a few percentage points above the contract rate; sometimes it is much higher.
Confirm the grace period — the number of days after the payment date before late status attaches. Five days is common; ten is not unusual; three is also seen.
IX. Default Clauses
Default clauses describe the events that allow the lender to accelerate the loan — that is, to demand the entire remaining balance immediately. Common events: a series of missed payments (usually three consecutive), a bankruptcy filing, a material misrepresentation in the loan application, sometimes a change of address without notification.
Confirm what counts as default. Confirm the lender’s rights upon default. Read this section carefully.
X. Information Rights
Confirm what information the lender will report to the credit bureaus, on what cadence, and whether good-standing months will be reported as well as late or missed payments. Most reputable Canadian lenders report monthly to both Equifax and TransUnion, including good-standing months — which is part of the benefit of a structured personal loan as a credit-building instrument. Confirm this in writing.
Also confirm your right to receive statements, the channel in which they will be delivered (paper, email, online portal), and the frequency.
XI. Assignment Clauses
An assignment clause allows the lender to sell the loan — transfer your obligation to a different lender — without your consent. Many Canadian personal-loan agreements include such a clause as a matter of course; the loan may end up being serviced by a different institution six months from now.
This is not necessarily a problem. The terms of your loan do not change when it is assigned; the rate, the term, the payment, the prepayment rights all remain as written. The change is in who you write the cheque to. But it is worth knowing about, and worth confirming whether the lender will notify you in writing of any assignment.
XII. Governing Law
The governing-law clause specifies which province’s law governs the agreement. For most personal loans extended to a borrower in Ontario, the answer is Ontario. For a borrower in another province, the answer should usually be that province. Confirm it.
After the Checklist
The twelve items above are the items that most often produce surprise after signature. Reading the agreement is not a substitute for understanding the agreement; the second is what matters. A Meridian specialist is happy to walk through any item that is unclear before you sign — not just the ones that look unusual. The questions are not embarrassing. The agreement is a serious document. Treat it as such.
