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Payday Loan Agreement: What to Pay Attention to

  • Written by a contributor

When you finally find a lender that fulfills your needs, it’s essential to read the loan agreement carefully to avoid unpleasant surprises like late payments or prepayment fees during the loan period. The payday loan agreement contains crucially important information that the borrower has to mind for the loan process to be lucrative and overall beneficial.

The Purpose of the Loan Agreement

The objective of the loan agreement is to define the parties involved in the loan process, the rights guaranteed, and the duties bestowed on the parties. The loan agreement has to be created in accordance with state and federal law. The agreement of a loan taken in different states may have different regulations depending on the location of the lender and the borrower.

The loan agreement also serves as proof that loan duties will be fulfilled by both the lender and the borrower. This document states the exact $1- $999 loan amount, loan period, APR, and any existing fees.

Reasons for Signing the Loan Agreement

When the lender borrows money he commits to the payday loan process and agrees to terms at what the loan should be issued and repaid. Basic information that the loan agreement contains is:

  • Loan amount;

  • APR;

  • Repayment plan;

  • The existence of collateral;

  • The existence of the origination, late payment, and prepayment fees and their size.

The loan agreement ensures that the money is a loan, not a financial award, and has to be paid back.

The document may contain an amortization table, in which the size of down payments is shown with already calculated interest.

Types of Loan Repayment

There are two types of payday loan repayment strategies: on-demand and fixed. The demand repayment plan is used when a person borrows money from a close person or a state bank.

Lenders online most often choose fixed repayment plans which are more convenient for the borrower as well. The repayment process happens on a fixed schedule. The money is withdrawn from the borrower in the form of installments (fixed-sum payments) over a definite period of time.

Interest Rate

One of the most important articles in the loan agreement is the APR. The interest rate depends on various factors:

  • The type of the loan (secured or unsecured);

  • The inflation (if it happens within the loan period);

  • The borrower’s income size;

  • The borrower’s credit score.

The interest itself can either be fixed or a floating one. The fixed interest rate doesn’t change during the loan life. If a borrower borrows $1000 at 5%, at the end of the loan he will repay $1050 (which is the loan amount plus the 5% interest fee).

The floating interest rate may change in accordance with the benchmark rate (LIBOR, for instance). Floating rates are usually calculated on long-term loans like mortgage loans.

Length of the Loan Agreement

The length of the loan agreement life is determined by the type of the loan (short-term or long-term) and the loan amount. Before signing the loan agreement, the lender estimates the number and size of the down payment on the loan. If the borrower agrees to these conditions, the agreement comes into effect.

Breach of Contract

Unless the borrower repays the loan in time, the lender may force late payment fees on him. The conditions on which such fees or penalties are calculated and their size have to be clearly stated in the loan agreement, which the borrower has to study carefully beforehand.

The loan agreement is a document that is significant both to the lender and the borrower. If it’s been breached, both the borrower and the lender may call arbitration to action and defend their rights.


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