MONEY MANAGEMENT 6

What You Need to Know About Contracts

It seems that everywhere you go these days, someone wants you to sign on the bottom line. Whether you want to open a checking account, get a cell phone, rent an apartment, order cable television, get a credit card, join a gym, purchase furniture, or buy insurance, you are typically required to sign a contract to get what you want. But is it really that easy, just signing on the dotted line to get what you want? Are all contracts basically the same? What do you do if the salesperson doesn’t give you time to read the fine print and urges you to sign right there on the spot? If you are required to sign the contract to get the product or service, do you really need to read the fine print?

Because you are so often required to sign documents, it can be easy to take the word of whomever you are dealing with, especially when contracts are packed full of fine print and legal language. You can avoid a lot of future headaches, however, if you take the time to read all the fine print before you agree to the terms set out in any contract. After reading the contract in its entirety and asking any questions you might have, you can decide whether you can live with the terms and if you still want the product or service.

Rental agreements or leases are just one of many contracts you may be asked to sign. Even if you never sign one yourself, chances are you’ll have someone close to you who will. Knowing what to expect when it comes to leases can better prepare you, or someone you know, when it comes time to sign on the dotted line.

Leases vary in length and content, but most will outline the amount of rent due each month and how much of a security deposit you are required to pay to cover any damages to the apartment or house. It will also list to whom you should make your rent payment, when it’s due, and the penalty for making a late rent payment. Information on who can live in the apartment, what should happen if you break your rental agreement, and what utilities you are responsible for paying may also be in the lease you sign. Some rental agreements have information on pet policies, the terms for notifying the landlord when you intend to move out, and subletting.

As with all contracts, you should read a lease agreement carefully. You should also inspect the unit with equal care. Is it clean and in good repair? Do you feel safe there? Ask people living nearby about the neighborhood, and make it a point to visit the home or apartment during the day and at night. Note if there is any excessive noise during your visits and whether you can find adequate parking. You don’t want to find yourself in the position of having signed a lease only to learn that you’ll have to park five blocks away every night.

Just before you sign the contract, walk through the house or apartment with the landlord and take a camera along to document the condition of the appliances, walls, and carpet. It’s important to do this because when you sign a rental contract, you become responsible for any further damage to the property. Keep the photos you took, along with a detailed list of any issues relating to the house or apartment’s condition. If a question regarding damages arises, you’ll have this information to prove what damages were there before you moved in. It is not uncommon for renters to find themselves sued for damages to an apartment or house, so keeping careful documentation is important to avoid such a problem.

Once you decide to accept the house or apartment and the terms laid out in the contract, you’ll sign on the dotted line. Ask your landlord for your own copy of the contract so that you can refer to it should questions arise. When you make your rent payment each month, it’s preferable that you pay by check or money order, keeping your receipt in a safe place. If you have no choice but to pay by cash, get a receipt each time you make your payment. Some day your receipt may be necessary to prove that you have made a payment.

If you’re planning on renting your new place with a roommate, you need to consider how you might be affected if you’re counting on this person to pay a portion of the rent and he or she doesn’t follow through. What happens if your rent is due on the first and your roommate doesn’t get paid until the tenth? The result depends on what the contract states and who signed the contract. Anytime you sign a contract to rent an apartment or home and cannot afford to make the full monthly payment without the help of one or more roommates, you put yourself in jeopardy. Jake learned this the hard way.

When Jake went to college, he and three of his good friends decided to rent an apartment. Jake didn’t think much about signing the contract himself because he trusted his friends to pay the rent and to take care of the apartment. After their first semester together, one of Jake’s friends decided to transfer to another college, leaving Jake and the remaining two roommates to make up the difference in rent.

Making the rent payment had already become more difficult after one of their roommates had moved out, but to make matters worse, Jake and the others found that they had to devote more time to studying and therefore had less time to work. One month during mid-term exams, one of the roommates didn’t have enough money to pay his share of the rent. Not knowing what to do, they sent the landlord what money they did have. The landlord charged a $50 late fee, but agreed to give them ten extra days to pay the balance of the rent still due.

This wasn’t the end of their troubles, however. During the course of the next month, one of the young men lost his job and had no money for rent at all, but no one, including Jake, wanted to tell their good friend that he had to move out. Unfortunately, by doing nothing, Jake and his friends were evicted from their apartment for non-payment of rent. Jake was sued for all of the rent for the months remaining on the contract and for damages that had occurred during a rowdy game of indoor flag football. Because Jake was the one whose name was on the contract, he ended up paying for all the problems himself, leaving him thousands of dollars in debt.

He never saw this coming, as he counted on all three of his roommates—they were his friends. It took him a long time to repay the debt, and his credit was damaged as a result of this unfortunate situation. The only way to avoid this kind of problem is to rent a home or apartment only when you can afford to make the full payment without the help of roommates. If you are moving in with a group of friends, let someone else sign the contract. If that isn’t possible, develop a written contract between you and your roommates and only have roommates you are willing to enforce the contract with. Or have all the roommates sign the lease. Decide who will make utility payments before you move in and include this in your rental agreement.

If you buy a home rather than rent, you’ll sign a mortgage contract for a period of 15, 20, or 30 years, sometimes more. Because you are signing a contract that remains in effect for such a long period of time, the wisest thing you can do is to enroll in a home buyer education program offered by a HUD certified housing counseling agency. HUD (an abbreviation for the Department of Housing and Urban Development) sets guidelines for certified housing counseling agencies to ensure that you receive all the information you need. If you participate in a pre-purchase housing program before finding a realtor, home, or financing, you not only gain important information about the home-buying process, but you can also save yourself thousands of dollars.

Whether you rent or purchase a home, you need to set up utilities. Some electric, gas, and phone companies require you to sign a contract and some require you to pay a deposit. If you make your payment on time for a period of time, usually a year, you may be able to get your deposit back. Like lenders and landlords, the utility company wants to know you will pay the bill if they provide service to you. If you sign a contract for utilities, read the contract first. While you probably can’t negotiate the terms of the contracts with the utility companies, you should know the terms. You should ask for a copy of the contract and keep it in a safe place along with your rental contract or mortgage documents.

If you have a cell phone, you’ll probably have to sign a contract, too. Cell phone plans and contracts vary a great deal from provider to provider, so it is important that you research all your options before choosing a plan. It is much easier to increase your services than to reduce them. Normally, any time you want to make changes to your service, you increase the length of the contract. In addition, most of the contracts have high cancellation fees.

Think about any special circumstances that may influence the type of plan you choose. For example, if you travel a lot, make sure the phone has service in your travel area and that you won’t be charged extra for these calls. Also take into account whether or not you will be moving during the term of the contract. If you may be moving, the cell phone may not have service in your new area, or the service may be more expensive.

If you have a family, you can find cell phone plans with multiple lines, but you need to understand how overages can influence your monthly bill. Debbie and Dave have four daughters, two that are in college, one in high school, and one in middle school. Debbie and Dave researched various cell phone providers and found a plan that allowed them to have four lines to keep up with their busy daughters.

Unfortunately, Debbie and Dave misunderstood the salesperson regarding when they would incur additional charges on their phones. Debbie and two of her daughters attended a soccer tournament two states away from home. During their absence, Debbie made numerous calls checking on her other two daughters and husband. When they got their cell phone bill later that month, they were shocked to see that it was over $800. Debbie and Dave found out the hard way that their cell phone plan was not one that worked for their family. Worse yet, they could not get out of the contract without paying substantial cancellation fees, an additional $200 per phone or another $800. Debbie and Dave had budgeted $100 a month for cell phone use. Not understanding the contract cost them $1500 that they could have used for their goals.

When you sign any contract, know beforehand if you are required to pay a deposit or any kind of set-up fee. In addition to asking the salesperson careful questions, you should ask where this information is located in your contract. Read, too, if you can get your money back and under what conditions. Be sure to understand the exact terms of your contract and know what happens if you terminate the contract early or find yourself in a circumstance when you are unable to stick to the terms of the agreement.

Understanding the terms of any contracts you might sign to buy furniture is particularly important. Just about every weekend, you can find advertisements announcing that you can buy furniture with no money down, no payment, and no interest for a full year.

While this might be a good deal for you, you need to understand the specific terms of the contract you sign. If you do not pay the entire amount of the purchase price in the period set out by the contract, interest may be retroactive for the entire time you have had the furniture.

As an example, let’s say you purchase a new living room set for $1500 on a contract that is interest free for twelve months. At the end of the twelve months you find that you still owe $100. Because the entire amount has not been paid in the twelve months, you may be charged interest over the entire year on the $1500, not on the $100, as you did not pay the furniture in full as based on the terms of the contract. Before you sign a contract to buy furniture, ask if there is a penalty for paying it off early and beware of any additional or add-on loans to your zero interest loan.

With some items you purchase, you may be offered an extended warranty. Before purchasing the warranty, make sure you know what labor and parts are covered and what is not covered by the warranty. You should also take into account how much wear and tear you expect the item to receive. For example, a refrigerator in a household of six people will get more wear and tear than a refrigerator in a household of one. The cost of the warranty versus the cost of replacing the item should also be considered.

Terry purchased a fan for $12 with a one year warranty. He was offered an extended warranty for $25. Terry did not take the warranty, as he figured he could have purchased two additional fans for the price of the warranty.

Insurance is another item that typically requires you to sign a contract. Liability insurance on your car is a type of insurance you must have if you drive a car. Liability protects the other person should you cause an accident and harm another person, car, or property. Liability insurance does not reimburse you for damages to your car. The amount of liability insurance you will be required to maintain varies by state to state.

Collision insurance pays for damage to your car should you collide with something or roll your vehicle over.

Comprehensive insurance pays for losses or damage to your vehicle caused by an event other than collision. An example of this would be hail damage. If you finance a vehicle through a bank or credit union you will be required to maintain liability, comprehensive, and collision insurance, otherwise known as full coverage. In some cases when the balance of your loan falls below $2000, you will no longer be required to maintain full coverage insurance on your car. Check with your lender for details.

You must have homeowner’s insurance if you have a mortgage on your loan. Like car insurance, homeowner’s insurance protects you from loss and liability, which is particularly important considering that your home is typically your largest asset. Flood insurance must be purchased separately from homeowner’s insurance for individuals who purchase homes in areas designated as flood zones.

Don’t confuse homeowner’s insurance with mortgage insurance. Mortgage insurance is normally added right into your mortgage payment to protect your lender from losses. Once your equity in your home is 20% or more, you should contact your lender to see how to cancel the mortgage insurance. This will reduce your mortgage payment.

Even if you are renting a house or an apartment, obtaining renter’s insurance is important if something should destroy the building or damage your personal possessions. People sometimes mistakenly believe that the landlord is responsible for insuring you. However, a landlord will typically have insurance on the building alone, not on any of your personal belongings.

Life insurance is something you may want if you have a family that is dependent on you. It provides for payment upon a person’s death, helping the family cover financial burdens and a loss of income. The two most common types of life insurance are term and whole life. The amount of life insurance coverage you obtain should usually cover funeral costs and loss of income for the time it takes the family to adjust. You need to strike a balance between having enough to live after the death of a family member and not over-insuring yourself. Speaking with a reputable insurance agent and analyzing your personal situation closely can help you achieve this balance.

Medical insurance is something you should have to protect you from losses due to serious illness or accident. If medical insurance is available through your employer, you should seriously consider it. Typically, group medical insurance through an employer is less expensive than obtaining medical insurance on your own.

Because you purchase insurance to protect you against loss, you need to read and understand all the details of your insurance contract. The contract will state under what conditions the insurance company will pay your claims and how much of the claim they will pay. Insurance is not something most people like to think about, but it is something that is designed to protect your financial well being.

If you have auto insurance, you need to know what kind of coverage you have, should you be in an accident. If you have homeowner’s insurance, you want to know what types of claims it will cover. You need to know how much and what kind of medical bills your medical insurance will cover. You need to know under what conditions your rental insurance will pay for claims. You will want to know how much your life insurance will pay your family if you are in an accident and lose your life.

Most insurance policies have a deductible. The deductible is an amount you must pay before the insurance company will pay on any claims. You need to determine what deductible amount is right for you. Normally, the higher the deductible you pay, the lower your premium or payment to the insurance company.

Consider your car insurance. If you can handle paying out $1000 should you be in a car accident, then choose the $1000 deductible, as your monthly or quarterly payment to the insurance company will be lower. If a deductible amount of $1000 is too high for your budget to handle, and you don’t have the money in savings, choose an amount that works for you. Deductibles in the amounts of $100 and $500 are not uncommon for car insurance. If you are in a car accident, you will want to get your car fixed. You don’t want to worry that you won’t be able to pay the deductible to have the repairs done.

When looking for insurance, compare prices. Insurance costs may vary from company to company. Make sure that the insurance company you choose is reputable, as you want the company to be there for you should you ever need to file a claim.

Reading the fine print of any contract will tell you what your rights and responsibilities are, as well as those of the business or individual with whom you have the contract. In the next chapter, you’ll learn what laws there are to protect you if a business should break a contract or use unfair or deceptive business practices.

Chapter Review

• To purchase a product or service, you often need to sign a contract. It is important to read the terms of the contract before signing. Any time you feel pressured to sign a contract without reading it, you should think twice about signing.
• Before signing a rental contract, know what your responsibilities are and what the responsibilities of the landlord are.
• If you are purchasing a home, enroll in a pre-purchase homebuyer education class offered by a HUD certified housing counseling agency.
• When signing up for utilities, find out if a deposit is required and whether you can get your deposit back.
• If you sign a contract for a cell phone, make sure the plan you purchase suits your needs.
• Read furniture contracts carefully and follow through with the terms so that you don’t have to pay unnecessary fees and interest.
• Your insurance contract will tell you what kind of claims your insurance company will cover and for what you are responsible. Be sure to choose a deductible that works for your budget.