Friday, January 11, 2008

Doing your reading: An important step

We all dread signing contracts. They usually mean we're going to be spending an inordinate amount of money on something. Without question, this is the most dangerous situation you can ever been in, at least in the world of personal finance. You're signing a crucial document that may or may not be able to break you.

Whether it's for any type of loan, a savings account or a credit card you're asked to authorize certain legal mechanisms. Most of these mechanisms are legal requirements put into place by Federal and State agencies to protect both parties involved. As such, most contracts are designed to both fulfill a legal obligation (i.e. binding you to a deal) and explain itself in full, elaborate detail. They're often highly technical documents and a lot of people often find themselves at a loss.

They take one look at an intimidating wall of text, lists and addenda before shuddering. Which is an absolute shame, because that terrifying piece of paper holds your fate. It may be uncomfortable and tedious to look through it word by word, but it is your responsibility as a consumer to do just that.

Which sounds like common sense, right? It's an accepted fact that reading any contract before putting pen to paper is not only a good idea, but suicidal otherwise. So then why do so few people do it? Can you think back to when you applied for your last credit card? What about your last car?

Did you read the contract in full detail? Or did you get the jist of it from your significant other? Or did the sales representative fill you in on the meat and potatoes? Chances are you settled with the far more comfortable option of nodding and grinning. If not, power to you. You've set a very positive example.

If you did nod, grin and autograph with only a slight understanding of the terms and conditions, I'm not out to attack you. I've done it myself on many occasions prior to present. It's far too easy to appear you know what's going on and just do what you're told.

But consider some of the things attached to most loan contracts.

  • Loan amount, interest, finance charges
  • Down payment amount, requirements and information
  • Payment schedule, late payment charges
  • Refinancing options or lack there of
  • Early payment penalties
  • If collateral is being offered, what it is
  • What happens if you fail to consistently make payments
  • If you have to pay collection costs, towing fees (for a defaulted car) or trash out fees (if a defaulted home)
  • If the lender is within their rights to seize other assets should you be unable to may consistent payment
  • Terms of the security of the loan
That's a lot of critical information. But let's say you trust the profession who's presenting you with an elaborate contract. Let us say he's your best friend and you've known him for thirty years. He'd never put you into a position to screw you over.

Even if the terms of the loan are favorable for you, did you ever consider misprints or typos? Depending on the flexibility of the contract it's quite possible it would be riddled with typos. Sure, simple typos like "paymnt pln" are relatively benign. But who's to say the individual working on the contract prior to your arrival wasn't rushed? Who's to say they didn't mix up two unrelated documents and instead of your nice 3% annual interest rate you're now stuck with 10%.

Or instead of the proper mailing address there's a 1 in front of your street number and all your mail is actually going to the anti social guy down the street, including payment coupons.

Or maybe you didn't think it possible for a shady bank to seize your car after only two missed payments.

The same is true to a slightly lesser extent with credit cards. Consider these usually universal bits of data typically included on any given credit card application:
  • Annual fee
  • Annual Percentage Rate (APR) for purchases and balances
  • Whether the interest rate if fixed or variable
  • Interest rate and how much higher it can get if you are a bad customer
  • Minimum payment percentage
  • Credit limit
  • Penalties, fees and actions that can be taken with missed payments
  • Penalties, fees and actions that can be taken with exceeded maximum spending limits
  • Fees and actions for cash advances
My advice? Obtain any piece of paper you are required to sign at least one day in advance so you can read it over and check for errors and things you do not fully understand. This will allow you to do it at your leisure in a comfortable environment, instead of at a table full of angry lenders. And never sign documents that contain blank spaces in the body unless it's been written in with pen by an individual you can shake hands with.

Not only is it your right to take as long as you need to examine a legal document, but it is also your right to have it explained to you in full detail. So ask questions until your mouth is dry if need be.

Any individual not willing to allow you to read over your contract in full is attempting to hide something. As such you should always take your business elsewhere, even if it means a slightly higher interest rate or larger down payment.

Just remember the hardships you've had in the past and remember, you don't want to repeat those months/years. Do you?


Pan said...

You always come up with the best clip art for your posts.

Anonymous said...

Another excellent post on the realities of life in our modern world. The days are long over of trust in a nod and a handshake when making deals. And your so right, we are 100% responsible for our own financial one else is going to look out for our money! It is so interesting that such a basic thing as signing something before reading it is so overlooked by the majority of us. We have to remember the basics before we obsess over the larger issues. I know that when I was younger I trusted much too much...but as I've aged (and have more to lose)I read every darn piece of paper that is put before me to sign! Good read...I liked it!


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