Whether it’s an apartment lease, a mortgage or credit card application, or any other contract, there is always paperwork. Sometimes it’s just a page or two, while other times paper stack can be an inch thick. Almost every such document is laced with fine print disclosures, exceptions, waivers, terms, and conditions. It can be tempting to avoid the tedious process of reading the legalese. But never simply sign the dotted line and call it a day!
If you don’t do your due diligence and uncover any hidden financial landmines buried obscurely within the text, you’re inevitably in for a rude awakening. It is important that you know what to look for before applying or signing anything. Otherwise, you’ll likely be agreeing to some combination of origination fees, rate hikes, pre-payment penalties, retroactively-applied deferred interest, etc. At best, such terms can cost you a ton of extra fees and interest. In some cases, you risk ruining your credit score or losing your assets.
Often times, trusting individuals make the mistake of assuming that established banks and lenders offer fair terms in their lending disclosures. Unfortunately, “fair” is a subjective term. From a legal standpoint, if you sign the application under the statement that you “have read, understand, and agree to the terms” therein, the lender can argue that you found the terms to be “fair”. That’s why it’s so important to have the bigger, complete picture. Fine print not only uses smaller print, but often also a lighter ink color, hard-to-read font, and all-caps to make it more difficult and unpleasant to read. It’s not by accident. Lenders almost seem to want you to overlook it.
Why You Should Carefully Read the Fine Print
1. Know what all the terms and conditions are.
Not only know what they say, but also how they apply to you. For instance, some loans require collateral such as your home, car, or business. You will lose your collateral if the terms of the loan are not met. In addition, understand how the loan or credit card you are applying for today can affect your long-term financial situation.
2. Be sure you understand the late fee policy.
Typically, a missed or late payment affects your credit score and can make it difficult to secure any future financial resources. A late payment can also invoke a penalty interest rate of up to 30% (or more), making your debt payoff efforts exceptionally difficult.
3. Price shop the interest rate.
Be certain the interest rate is something that is comparable to the current, competitive rates. Also, know if it is a fixed or variable rate. Avoid variable rates whenever possible, as your payments will fluctuate based on whatever the current market prime rate is. Always opt for a fixed rate for a loan so you can be sure that your payments will stay the same no matter what the market is doing. Beware that adjustible rate loans are often negatively amortized, meaning that to complete the loan payoff within the contracted period, you must make a balloon payment or otherwise refinance.
4. Look for “if/then” statements.
These are the sentences that explain what will happen if you do, or do not, fulfill your obligations.
5. Watch out for balloon payments!
This is a common scenario in large loans, especially mortgages, which may have low monthly payments, but a much larger payment (sometimes thousands- or tens-of-thousands of dollars) is required at a specific time. Lenders often lure borrowers with the attractive lower monthly payments, then encourage them to refinance the loan later to avoid the balloon payment payoff. Keep in mind, refinancing your loan “resets” the payoff clock, extending your payments into the future while front-loading interest into the lender’s pocket. Banks love it… It costs you thousands more in interest and keeps you ensnared in your lender’s web.
6. Seek alternative ways to save money or get a better contract.
As you consider various options available, be sure to read all the fine print regarding interest, payments, collateral, etc. Always look for terms that assure the best outcome without putting you at risk. Keep in mind that credit cards and many loans are “contracts of adhesion”, meaning that the creditor reserves the right to unilaterally change the terms, interest rate, etc. simply by notifying you in advance. Contracts of adhesion do not require your subsequent approval to change the terms. You agree at the time of the application that you’ll adhere to their terms, simply by agreeing from the onset that they can change the rules in the middle of the game.
Aplpy a Common Sense Approach to Understanding Your Agreements
Would you go into a restaurant where the menu was written in a language you can’t read, and randomly order something? Perhaps the most adventurous foodies out there may; but for many, especially those with food allergies, this would be tantamount to disaster. Yet, many people are quick to sign the dotted line on contracts and credit card applications without reading the fine print. Like eating unknown foods can be dangerous health-wise, the side effects of blindly signing contracts can be financially dangerous!
Before you make a major financial decision, be sure to read all the fine print. If you don’t understand something, seek counsel. We’re not encouraging you to take on more debt by applying for new loans and/or credit cards. But if you do find yourself shopping for new credit resources, we want to ensure your eyes are open and you’re savvy to what lies ahead.
Learn more about some of the most common dangers and misleading practices contained in fine print (including examples and illustrations) in The Financial Acumen Course®. Protect yourself from predatory lenders and deceptive marketing by enrolling in the course today. It can save you thousands of dollars. Being forewarned is forearmed. Don’t sign the line of any contract until you know what you are getting into. It’s better to apologize now for changing your mind than to be locked into a bad decision later.