How do you read the disclosure a lender gives you before you sign a personal loan?

Summary

Start with four numbers every closed-end loan disclosure has to include: the APR, the finance charge, the amount financed, and the total of payments. Subtract the amount financed from the total of payments and you get the finance charge, which is what the loan costs you in dollars. Below those four, the form tells you whether you'll pay a penalty for paying early, what a late payment costs, whether the lender takes collateral, and whether any insurance was added.

The four numbers, with real figures

Regulation Z requires each term to appear by name with a short plain-language description. The rule's sample descriptions are in the middle column. The right-hand column uses the disclosure example Upgrade publishes for a $10,000 loan with a 5% origination fee, 36 payments of $341.48, and a 17.59% APR.

Term	Regulation Z's sample description	Upgrade's example
Annual percentage rate	the cost of your credit as a yearly rate	17.59%
Finance charge	the dollar amount the credit will cost you	$2,793.46 (calculated)
Amount financed	the amount of credit provided to you or on your behalf	$9,500
Total of payments	the amount you will have paid when you have made all scheduled payments	$12,293.46

Upgrade doesn't state the finance charge on its page, so that figure is the total of payments minus the amount financed. Notice that the $10,000 you applied for doesn't appear anywhere in the four boxes.

Why the amount financed is smaller than the loan

The amount financed starts with the principal, adds anything else the lender finances that isn't part of the finance charge, and then subtracts any prepaid finance charge. An origination fee taken out of the proceeds is a prepaid finance charge, which is how $10,000 becomes $9,500.

That figure also has to be broken down, either on its own apart from the other disclosures or through a written note that you're entitled to the breakdown if you ask. The breakdown shows money paid to you, money credited to your account with the lender, money paid to others on your behalf (a card issuer, in a consolidation loan), and the prepaid finance charge.

The payment schedule

This part lists the number, amounts, and timing of your payments. In the Upgrade example, 36 times $341.48 is $12,293.28, which is 18 cents less than the stated total. One of the payments, probably the last, has to be slightly larger, and the schedule is where you would see it.

The statements below the boxes

Prepayment: for a loan that charges interest on the unpaid balance, whether you can be charged for paying off some or all of the principal early.
Late payment: any dollar or percentage charge for paying late.
Security interest: whether the lender has or will take a security interest, and in what property.
Insurance: credit life, disability, or similar coverage can be left out of the finance charge only if the lender discloses in writing that it isn't required, discloses the premium, and you sign or initial a written request for it. If a policy shows up that you don't remember choosing, look for that signature.
Required deposit: if you must keep money on deposit as a condition of the loan, a statement that the APR doesn't reflect it.

The form also refers you to the contract itself for what happens on nonpayment or default, the lender's right to demand the whole balance early, and prepayment rebates and penalties.

If the APR isn't what you were shown

An APR counts as accurate if it is within 1/8 of a percentage point of the correctly calculated rate. If you got disclosures earlier and the APR at signing differs by more than that, the lender has to give you new disclosures of every term that changed.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pricing pages on the dates shown. We have not used these products. Corrections: contact form.