If you always stop to read the fine print before signing anything, congratulations – your parents trained you well. If you don’t, beware: Your signature could commit you to a long-term gym membership you don’t really want, an apartment you can’t afford, or worst of all paying off someone else’s loan you cosigned.
Broadly defined, contracts are mutually binding agreements between two or more parties to do – or not do – something. It could be as simple as buying coffee (you pay $3 and the restaurant agrees to serve you a drinkable beverage), or as complex as signing a 30-year mortgage.
Once a contract is in force it generally cannot be altered unless all parties agree. And, with very few exceptions (e.g., if deception or fraud took place), contracts cannot easily be broken.
Before you enter a contractual agreement, try to anticipate everything that might possibly go wrong. For example:
- After you’ve leased an apartment you decide you can’t afford the rent or don’t like the neighborhood.
- Your roommate moves out, leaving you responsible for the rest of the lease.
- You finance a car you can’t afford, but when you try to sell, it’s worth less than your outstanding loan balance.
- You buy a car and only later notice that the sales agreement includes an extended warranty or other features you didn’t verbally authorize.
- You sign a payday loan without fully understanding the terms, and end up owing many times the original loan amount. (The same goes for pawnshops and car-title loans.)
- You buy something on sale and don’t notice the store’s “No returns on sale items” policy.
- You buy a two-year cellphone plan, but after the grace period ends, discover that you have spotty reception and it will costs hundreds of dollars to buy your way out.
- You buy smartphone insurance, but don’t discover until after it’s been stolen that they can replace it with a refurbished model.
Financially inexperienced teenagers and young adults often make these kinds of mistakes, so discuss the implications of signing contracts with your kids well before they turn 18.
Cosigning a loan. This can be particularly risky. If the other person stops making payments, you’re responsible for the full amount, including late fees or collection costs. Not only will your credit rating suffer, but the creditor can use the same collection methods against you as against the primary borrower, including suing you or garnishing your wages. Still, there may be times you want to cosign a loan to help out a relative or friend. The Federal Trade Commission (FTC) has a handy guide that shows precautions to take before entering such agreements. If you’re trying to help your child establish a credit history, another alternative would be to make him or her an authorized user on one of your accounts. They’ll get their own card, and you can usually restrict the amount they’re able to charge. But be aware: Authorized users aren’t legally responsible to pay balances owed, so oversee account activity closely.
Cooling-off rule. If you buy something at a store or online and later change your mind, you may have a difficult time returning it. But if you bought an item in your home (e.g., from a door-to-door salesman) or at a location that’s not the seller’s permanent place of business (e.g., at a fairground or hotel room) you may be protected by the FTC’s Three-Day Cooling-Off Rule. Under this rule, the salesperson must reveal your cancellation rights at the time of sale and give you two copies of a cancellation form (one to keep and one to send) and a dated copy of your contract or receipt. Note that numerous exceptions apply. If your purchase is eligible under the rule, however, you have three business days in which to ask for a full refund.
A few additional reminders about contracts:
- Ensure that everything you were promised verbally appears in writing, especially such terms and conditions as interest rates, down payments, discounts, and penalties.
- Make sure all blank spaces are filled in or crossed out before signing any documents –including the tip line on restaurant and hotel bills.
- Don’t be afraid to ask to take a contract home for more careful analysis or to get a second opinion. A lawyer or financial advisor can help.
- Don’t be pressured into signing anything. If salespeople try that tactic, walk away. (Be particularly wary at timeshare sales meetings.)
- Keep copies of every document you sign. This will be especially important for contested rental deposits, damaged merchandise, insurance claims, extended warranties, etc.
- Take along a “wingman” if you’re making an important decision like renting an apartment or buying a car to help ask questions and protect your interests.
- Be wary of “free trial” offers. Read all terms and conditions and pay particular attention to pre-checked boxes in online offers. Failure to uncheck them may bind you to unwanted terms and conditions.
Bottom line: Contracts protect both parties. Just make sure you fully understand all details before signing on the dotted line.
Follow Jason Alderman on Twitter: http://twitter.com/PracticalMoney
Jason Alderman is Senior Director, Global Financial Education, with Visa, Inc.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.