How often are you asked to sign something? I don't mean autographs or birthday cards, but documents that are legally and financially binding. It could be something as simple as signing a sales receipt or endorsing a check, or a life-altering action like buying a house. Either way, they are all contracts.
You've heard this advice many times but it still rings true: always read the fine print and consider the consequences before signing anything. After all, you wouldn't be asked to sign a document or form -- or click "yes" on a website -- unless somebody thought it was important, so shouldn't you think so as well?
In broad terms, contracts are mutually binding agreements between two or more parties to do -- or not do -- something. Once a contract is in force (i.e., signed) it generally cannot be altered unless all parties agree. And, with very few exceptions -- like in transactions where deception or fraud took place -- they cannot easily be broken.
Sometimes contracts are formal, signed documents that outline specific conditions and penalties if those conditions are not met: for example, if you don't make your mortgage payments, the lender can foreclose on your house. Other times they are verbal or implied agreements: if you buy spoiled milk, you can ask for a refund.
Before you enter into a contractual agreement, try to anticipate what might possibly go wrong. For example:
- You sign a lease but later decide you can't afford the rent or don't like the neighborhood.
- You buy a car you can't afford, but when you try to sell it, the car is worth less than your outstanding loan balance.
- You buy something on sale and don't notice the store's "No returns on sale items" policy.
- Your gym locker is broken into and you learn that your membership agreement denies gym responsibility for such thefts.
- You co-sign an apartment lease with a roommate who later backs out, leaving you responsible for the rent.
- You rent a car and later learn you accidentally agreed to optional insurance coverage or other features you didn't want or need. (Many standard rental contracts default to "yes" for each type of insurance, so you must specifically write or initial "no" to any coverage you don't want.)
- You agree to cosign a loan and the other person stops making payments, leaving you responsible for the full amount -- otherwise your credit will suffer.
- You enroll in a course you think is pass/fail but later learn it assigns letter grades.
- You buy a car and later notice that the sales agreement includes an extended warranty or other features you didn't verbally authorize.
- You buy a two-year cell phone plan but, after the grace period ends, discover that you have spotty reception.
Financially inexperienced teenagers and young adults often get into this type of trouble, so make sure you discuss the implications of signing contracts with your kids well before they turn 18.
Here are a few additional tips:
- Make sure anything you sign contains no unfilled blank spaces, even if the other party promises to fill them in a certain way. (To prevent misunderstandings, many contracts specify you must sign your initials by key provisions to acknowledge your full understanding.)
- Don't be afraid to ask to take a contract aside or bring it 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.
- Make sure everything you were promised verbally appears in writing. This is particularly important for terms and conditions such as interest rates, down payments, discounts and penalties.
- Keep a copy of every document you sign. This will be especially important in cases of 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. It's wise to have someone there to help ask questions and protect your interests.
- Be wary of "free trial" offers. Take time to read and understand all terms and conditions. Pay particular attention to any pre-checked boxes in online offers before submitting payment card information for an order. Failing to un-check the boxes may bind you to terms and conditions you don't want.
Remember, contracts are designed to protect both parties. Just make sure you fully understand all details before signing on the dotted line.
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.
To participate in a free, online Financial Literacy and Education Summit on April 4, 2011, go to Practical Money Skills.
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