There’s something potentially dangerous lurking in the fine print of that contract you’re about to sign.
It may be a new insurance policy, a car loan, credit card or some other financial product. Once it’s time to peruse the terms and conditions, you gloss over it, your eyes glazing over.
Fewer than one in 1,000 people take the chance to read fine print, and it’s not hard to understand why. It’s boring, it’s long, it’s tedious, and it’s time consuming. We’ll bypass sifting through pages and pages of verbiage, and hastily scroll right down to the bottom of the screen before reading a single word, trusting that everything is on the up and up.
It’s only after thoughtlessly signing your name or clicking ‘accept’ that those pesky details, loopholes and other issues with your contract emerge. Buried deep and printed small, it could be some condition or penalty you weren’t aware of, or some complexly worded legal lingo that benefits your lender or creditor, not you.
"Read the fine print" is good advice for a good reason. Failing to go over the fine print with a fine-tooth comb can result in being stuck with an agreement you’re not happy with, plus long-term financial repercussions. Here’s what to know and what to look for:
Buying a car ultimately comes down to knowing what your interest rate is and how it affects your monthly payment, but you may miss a lot if you neglect to read carefully your dealer’s agreement contract.
Before signing off on the loan, confirm with your dealer and in the agreement language that the terms are final. I faced this once when going to buy a car. Though my credit at the time was decent, the finance department determined only after we signed the paperwork that it wasn’t good enough for the terms they promised me, and that I needed to make a larger down payment if I wanted to keep the car.
Some car dealers may put similar "yo-yo financing" clauses in their contracts stipulating that they can void the deal at any time at their discretion. Often, buyers will return to the dealer the next day to seal the deal, only to be pressured to sign a new loan offer with worse terms.
Like most loans, check for any evidence of prepayment penalties if you pay off the loan earlier than planned. Your loan may also include other services and features you may not want, like GAP or collateral protection insurance, but if you don’t spot them in the fine print, they can jack up the price of your loan.
The 2008 mortgage crisis that tipped off the Great Recession certainly brought awareness to making home lending a more transparent business, but there’s still plenty of fine print to be aware of if you’re buying a new house.
One is your interest rate. Checking your loan contract to see how often the interest on the mortgage compounds can make a huge difference in the amount of money you spend or save over the life of the loan. While some mortgage APRs compound semi-annually, some compound monthly, raising the amount you owe your lender.
Blink and you might miss other fine print-specific items, like your mortgage pricing structure, aka the points system. When you pay points, you pay about a percentage point of your total mortgage loan, which can lower your monthly loan payment. These points can change from day to day until you finally secure a final interest rate and sign the mortgage with your agent or seller.
You’ll also want to look for other mortgage elements in the fine print. If your home loan is variable-rate, your lender may choose to register it as a collateral charge, allowing them to change your interest rate at any time without warning. Know if your insurance will be held in an escrow account. Is your mortgage portable or assumable? In the former, you may be able to take your current mortgage with you to a new house, even if rates have risen; and in the latter, you may be able to let someone else inherit your loan. The fine print of your contract should detail both.
Insurance is designed to give you peace of mind that your expenses are covered in the event of emergency or catastrophe, but don’t assume your policy comes with the same safety net. Exceptions and exclusions may be written plain as day in your contract, but you’ll never see them if you don’t spend some time looking at the fine print.
- Life insurance: Most policies will contain what’s called a contestable period, where your insurer can cancel your policy or deny coverage for the first two years of coverage. For instance, you may fail to disclose a pre-existing ailment, but if the insurance company finds out, especially if it alters the outcome of a claim or payout, they may choose to terminate the policy. Generally, most providers will also refuse coverage if a policyholder’s death was related to certain excluded events, like suicide, dangerous or illegal activity, or war.
- Renters insurance: Renters insurance will cover the personal belongings inside your domicile from damages and losses. It protects you against 16 types of unforeseeable liabilities like theft, fire or water damage, where your policy can reimburse you either for the actual cash value or your property, or the replacement cost. What policyholders need to be aware of in the fine print are the claim limits that may exist for their property. There could be a limit on valuables and jewelry, for example, that limit how much you can claim on certain items, even if they’re worth more than the policy covers. In such cases, don’t assume your policy is full coverage; it may only cover what are called "named perils," specific causes of property damage like fire, burglary, accidental water damage or lightning. You’ll also want to make sure that your policy covers "replacement cost," or the cost to replace your damaged items, rather than "actual cost," or the depreciated cash value of the items in question. Renters insurance may also limit or exclude coverage to business-related property, so if your apartment doubles as a home office, you may be out of luck getting reimbursed for some, if not all, of your supplies or materials.
- Auto insurance: Before assuming that your car insurance plan covers everything, there are details you might miss in the fine print. Where most policies carry liability coverage, it’s easy to assume that yours may have collision coverage when it actually doesn’t, leaving damages to your vehicle unprotected if you’re in an accident. There may be other clauses or insurer’s rules to be aware of, too. You could have a claim rejected, for example, if you’ve made modifications to your vehicle not covered under your insurance. Like a renters policy, some car insurance policies may also exclude or limit coverage if damages to your vehicle were the result of freak incidents, like lightning strikes or natural disasters, or hitting a deer in the roadway.
Credit card contracts can be tricky since each card company may have their own rules and regulations that you need to be aware of before opening an account. Your primary interest rate may be evident, but do you know your credit limit, minimum balance, or other penalty rates, late charges or odd fees listed in your card agreement?
There may be odd terms hidden in the fine print that can impact you financially at the worst times. Once, while traveling overseas, I obtained a travel credit card from my bank, but it was only after I arrived at my destination and began using the card that I realized there was a steep international transaction fee applied to each purchase. Because I didn’t bother to look for it in my contract, my travel budget was somewhat compromised to accommodate those fees.
Your card company may also have the freedom to change your interest rate at any time, and they’re allowed to do so, but you’ll need to ask before opening the card, or pour over your contract to find the regulation. Then there are other sneaky exceptions. Say your new card comes with an introductory zero-percent interest period for 90 days. What you might miss in the fine print is that after the period is over, any outstanding balances need to be repaid at the regular interest rate even if they were charged to the card during the intro offer. Or, you’ve built up a plethora of rewards on your credit card, but you missed the part about redeeming them by a certain date, and now they’ve expired.
Get down to the details
Fine print on a credit contract or loan agreement may seem like it’s being deliberately hidden to siphon more money from you, and that may very well be the case. (Why else would a lender or creditor want you to miss that information?)
The good news is that the information is legally required to be disclosed to you -- you just need to know where to look for it. Don’t get overwhelmed. Highlight portions of your agreement that sound vague or confusing, and don’t be afraid to call and ask your insurance agent or credit card rep about it, even if it seems like the answer should be obvious. Signing a contract without knowing it inside out is like paying for something without knowing for sure what you’re buying. Knowledge is power. Set the record straight and remember the importance of reading the fine print is about making sure a contract’s terms are on your terms.