The loan contract is the most critical document of the loan process. It describes what the lender requires of you once you are granted the loan. Whenever you borrow, you put your future into someone else’s hands; therefore, you need to know what you are doing. Read the entire contract and make sure you fully understand the details of the loan before you sign the loan agreement.

One of the most important things you should remember about loan contracts is that none of the clauses in the contract is in your favor; all of the clauses are in the lender’s favor. Let’s talk about four clauses that you will want to be aware of:

1. The insurance clause requires you to purchase life insurance that will pay off your loan in the event of your death. It benefits only the lender and increases the total cost of the loan. This clause is often used in mortgage loans.
2. The acceleration clause requires you to pay for the entire loan in full if you miss just one payment. This clause is often—but not always—disregarded if you make a good faith effort to catch up on your missed payment. But it still is a risk.
3. The deficiency clause stipulates that if you do not pay back the loan, and the company takes your collateral, you must pay any amount in excess of the collateral’s value; this clause takes effect if the money earned through the sale of your collateral does not satisfy the loan. You must also pay any charges incurred by the lender that are associated with the disposal of your collateral.
4. The recourse clause allows the lender to collect any outstanding balance via wage attachments and garnishments. This clause may also allow the lender to put liens on other properties that you own (these properties can act as secondary collateral) should you fail to repay your loan.

As stated above, none of the loan clauses are in your favor.