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Simple English definitions for legal terms
contract loan
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A quick definition of contract loan:
A contract loan is when someone borrows money and agrees to pay it back with interest. The interest is calculated on the full amount of the loan, even if the borrower pays it back in installments. This means the borrower ends up paying more in interest than they would with other types of loans. It's important to read the loan agreement carefully before signing up for a contract loan.A more thorough explanation:
A contract loan is a type of loan where the interest is calculated at the stated rate for the loan agreement's full term for the full principal amount, and then the interest is added to the principal before installment payments are calculated, resulting in an interest amount higher than if it were calculated on the monthly unpaid balance. This is also known as an add-on loan.
For example, if someone takes out a $10,000 contract loan with a 10% interest rate for 5 years, the total interest would be $5,000. This interest would be added to the principal, making the total amount owed $15,000. The borrower would then make installment payments based on this total amount.
Contract loans are typically used for consumer loans, such as car loans or personal loans. They are not as common as other types of loans, such as amortized loans or installment loans, because they can be more expensive for the borrower due to the higher interest rate.