Definition of Credit Terms

The credit terms offered by lenders or companies to individuals and businesses are the most important factor of any credit-related transaction. Understanding what the phrase "credit terms" means is critical to the success or failure of loan, cash advance or trade credit policies to all borrowers. Learning the exact credit terms being offered should influence all borrower actions.

Function

Along with required disclosures, signatures, dates and necessary legal "language," credit terms serve to define the entire loan transaction. Typically, the credit terms are the most important component of all loan agreements since they affect all parties to the contract regardless of other events that may or may not occur.

Features

The credit terms of a loan agreement typically outline at least three or four major items. The interest rate and the way interest is calculated are explained. The amount of money borrowed or the maximum that can be accessed (if it is a credit line) will be clearly stated. Credit terms also include the timing and amount of periodic repayment (monthly payment), along with the total time allowed to repay (maturity date). The credit terms also state the lender and borrower responsibilities surrounding delinquency, including late fees, default issues, prepayment penalties and legal remedies.

Considerations

One should consider all credit terms before entering into any loan agreement. Be comfortable that the credit terms in the written contract are identical to those orally stated before application. The lender should explain any variations in credit terms, particularly those not in the borrower's favor.

Warning

While most lenders are honest and trustworthy, there are those that may erroneously--intentionally or unintentionally--misrepresent some credit terms when speaking with borrowers. The written credit terms to which the borrower agrees in the loan note are the only binding issues. Any oral representations of terms, including interest rate, monthly payments or late charges have little or no legal standing. Read all documentation before signing disclosures and loan agreements.

Significance

Credit terms are the critical components of all loan agreements. There are numerous federal and state laws requiring full disclosure, both before and at contract signing time. If there are some aspects of typical credit terms that are not stated in a loan agreement, they simply don't exist. Should the lender violate any credit terms during the life of the loan, the borrower has a number of legal remedies. All credit terms must also abide by federal and local regulations to be enforceable, even if a borrower agrees to items outside of the regulations. One cannot agree and be bound by any credit terms that do not meet the regulations.