Understanding your credit agreement

Man Holding Paper At Laptop

Andy Townsend

Written by: Andy Townsend
Head of Marketplace Distribution, Consumer
11th May 2021



Whether you’re considering taking out a loan or already have, it’s important you take the time to understand your credit agreement.


What is a credit agreement?

A credit agreement is a legally binding contract between a borrower and a lender that must be agreed by both parties.

It holds the terms of any type of credit, such as overdrafts, credit cards or personal loans. That’s why a credit agreement for a personal loan is normally referred to as a loan agreement.

A credit agreement typically outlines the details of the loan and what you need to know when entering into a credit agreement. This includes information such as:

  • The type of credit agreement and any associated policy details (if applicable)
  • The cost of credit including any interest rate changes (if a variable rate loan) and repayment terms
  • The amount you’ll have to pay including any fees or costs
  • When payments are due
  • Your rights including your right to withdraw from the agreement
  • Conditions involving early repayments

When you take out a loan, you’ll be required to read and sign a credit agreement. It’s important to make sure you understand and agree with the terms outlined before you sign.



What is the cooling off period for a personal loan?

The cooling off period allows you to cancel or withdraw from a credit agreement for a period of time after you’ve signed. Your legal rights will always depend on the type of loan agreement you enter into, so it’s important that you always read your pre-contract information and credit agreement carefully before signing.

At Shawbrook, our cooling off period is 14 days after the date you receive a copy of the executed agreement (signed by you, and us). In this time, you’re free to cancel or withdraw without any fee . If you choose to cancel or withdraw, you must pay the full funds back within 30 days.

What happens if you don't pay back a personal loan?

Your credit agreement with your chosen provider will outline any fees associated with failing to pay back a personal loan.

However, there are some common scenarios:

  • Charged a fee. You may be liable for an automatic fee for late payment. This will vary with each loan, but you can find details of penalties in your credit agreement.
  • Increase in the overall amount you repay. Whenever you miss a payment, this generally will mean you owe more in interest and/or late payment fees.
  • Damage to your credit score. Late or missed payments are likely to affect your credit score. Damage to this can affect your chances of getting a loan in the future.    

Defaulting on a loan

If you miss a payment, you could fall into arrears and your lender may charge you additional interest and fees depending on the type of loan you have and your personal circumstances. If you continue to stop making payments over a certain period of time, eventually you may end up defaulting on your loan.

A default occurs when a borrower fails to pay back a debt according to the initial agreement and has failed to respond to the Default Notice within the prescribed period as set out in the formal notice. A default notice is normally sent when you’ve missed the full amount for three to six months.

After your account has defaulted, your creditor (the company or person who provided your loan) can take further action to retrieve the money they’re owed.

This can include:

  • Requesting repayment in full, rather than the agreed monthly instalments. You can offer to pay in instalments, but your creditor is not obliged to agree.
  • Passing your debt to a collection agency (companies who specialise in collecting debts).
  • Taking court action, which may include applying to take back goods (for example, if the debt was a hire purchase) or applying for a Count Court Judgment (CCJ).

A default will be recorded on your credit file and remain there for six years, even if you have paid off the debt since. This will make it harder to qualify for credit in the future.

As long as you keep to the terms of your credit agreement, you will not be required to pay in full before your contractual end date. It’s important to understand what can happen if you don’t keep up with your repayments so that you can make an informed decision when choosing the amount you borrow and how long for.

If you do experience unexpected financial difficulties, make sure you speak to your lender. They should always take into account your personal circumstances and offer support for your situation.



What is an early loan repayment?

Early loan repayment (also known as early loan resettlement) is when you choose to pay back your loan earlier than previously agreed.

Repaying early doesn’t always involve paying the full amount of your loan off at once. You may be able to choose a partial repayment option. If you’re considering making a partial early repayment on your loan, check with your lender to see if your loan term or monthly payments will be reduced.


Can you pay off a loan early?

Yes, you can pay off a loan early. However, you should bear in mind that paying your loan off early comes with an additional charge known as an Early Repayment Charge (ERC). This charge exists because paying your loan back early means that generally, you’ll pay less interest.

If you are considering settling your loan early, make sure you check your credit agreement first to understand what, if any, charges will apply.

For more information on paying a loan off early, read our guide on early loan repayments.


Get your personalised quote

When looking for a personal loan you may come across some confusing terms, make sure you read our ultimate guide to personal loans and our Personal Loan Terminology Glossary to see which option is right for you.

Personal loans can be confusing. At Shawbrook, we’re committed to being fair and transparent with everyone that applies for a loan. When you apply for an instant quote with us, it won’t impact your credit score and we’ll give you a clear picture of your guaranteed and personalised rate right from the start. Find out more about our personal loan offering here.


All loans are subject to status. The interest rate offered will vary depending on our assessment of your financial circumstances and your chosen loan amount. Terms and conditions apply.