Read the Fine Print: What to Look for in Your Next Financing Agreement

What is the fine print? And does anyone actually read it? Unfortunately, not always! It is shocking how many people agree to terms and conditions without ever reading and understanding them fully. This may be easy to do in the short term, but you may run into unexpected problems in the long term. By always reading the fine print, you can avoid surprises down the road, especially when it comes to financing agreements. It may seem like a drag to read them at first. But the more you understand the common language, the easier it will be in the future. Continue reading to learn more about reading the fine print in financing agreements and what to watch out for.

Read the Fine Print

What does “read the fine print” mean?

Read the fine print means to comprehend all the details. Not just the bolded, sales-y text, but the tiny print at the bottom too. A contract has a lot of information in it and there are key terms contracts typically use. 

By law, companies are required to disclose certain terms. As a consumer, you are required to understand and agree to those terms. Reading the fine print allows you to understand the details, terms, conditions, restrictions, and limitations of an agreement. In terms of a financing agreement, these details affect repayment, interest, disputes, and timelines.

These details are printed in very small font sizes and can be easy to miss. This is especially true if you get excited about the offer and sign right away without giving thought to the fine print. This is precisely where the phrase “always read the fine print” comes from.

Does anyone actually read the fine print?

When it comes to terms and conditions for a service or online platform, many people do not read the fine print. The same can be said for any other type of agreement, including financing agreements. For many, legal jargon is daunting, especially when it’s lengthy, so they’d prefer not to think of it at all. Alternatively, some may not know the importance of reading the fine print.

The question becomes, should you actually read the fine print? The answer is it depends. If you’re creating a new Instagram account, you probably don’t need to read the entirety of the terms and conditions. But if you’re signing off on a new loan agreement? You should probably read the entire agreement so you understand the terms, repayment amount, potential penalties, and early repayment fines. Ultimately, it depends what you’re signing for and how the agreement will affect your life and finances.

Related Reading: How is your credit score calculated in Canada?

There are common phrases used in financing offers and agreements to be aware of. The language used in contracts and agreements can be confusing, especially for the un-seasoned reader. Familiarize yourself with key words and phrases listed below. This will help you understand a variety of financial agreements. If you come across something you can’t understand on your own, conduct a quick Google search or consult a professional.

Raising Rates

This typically outlines under what conditions a creditor can raise interest rates. If the interest rate is variable, then you should expect to see something about the base prime rate, plus a certain rate. But if it’s fixed, the conditions to raise the rate should be more definitive. Generally, lenders can raise rates as a result of missed payments or not following the terms as agreed upon. Raising rates conditions outline how many missed payments will result in an increased interest rate.

Average Daily Balance

Average daily balance is used to calculate interest and other bank charges. Normally, the value is based on the average balance of each day over a calendar month, but it depends. From there, deposit interest and other charges are determined.

Grace Period

A grace period is the specified period of time you have before interest begins to accrue. Typically this is between 20 to 25 days. It is most commonly seen in credit card agreements, but you might find it elsewhere.

Default Annual Percentage Rate (APR)

If you have violated the terms of a financing agreement, interest rates rise to the default APR. Normally, you are paying the standard APR, which is the interest rate you agreed to originally. A default APR is a higher interest rate, which is charged as a penalty. For instance, if your standard APR rate was 19.99%, the default APR could be 5% points higher, at 24.99%.

Introductory Rate

Some credit card companies have introductory rates, often used as a sales tactic to get more users. They offer a lower rate than normal for new purchase for a fixed period of time. You might see something similar with a balance transfer. Knowing the term and interest rate before and after the introductory period is crucial before signing.

Related Reading: Guaranteed Investment Certificates (GIC)

What to Look for When You Read the Fine Print

Fine print exists to protect both companies and consumers through a legal contract. It gives a base line of service expectations, company and client obligations. Knowing what to look for when you read the fine print will help you enter mutually beneficial agreements. At the very least, it will help you understand what agreement you are entering and provide the opportunity to negotiate, if you wish.

Credit Card and Line of Credit Agreements

When signing a credit card or line of credit agreement, you want to look for and understand:

  • The total credit limit
  • The type of financing (secured, unsecured, credit card, line of credit)
  • The interest rate or APR
  • Interest type (fixed or variable)
  • The term (usually will be ongoing)
  • Any other potential and allowable charges
  • The grace period, in case you’d like to avoid interest payments
  • When minimum payments are due
  • Extra fees, like annual or enrollment fees
  • Optional additional services (like insurance)
  • The penalties and repercussion of missed or late payments
  • When the agreement takes effect

Loan Agreements

When signing a loan agreement, you want to look for and understand:

  • The total amount of the loan
  • How the loan is to be used, many loans can only be used for outlined purposes
  • The term of the loan (when the money must be paid back by)
  • Interest rate, fees, and APR
  • If it is a secured, or unsecured loan; and what property has secured the loan
  • Terms of repossession of secured loans, if you were to default
  • Payment terms: amount, schedule, and method
  • Result of missed or late payments
  • How legal disputes will be resolved
  • Early repayment penalties, if any

Mortgage Agreements

When signing a mortgage agreement, you want to look for and understand:

  • The total amount of the loan, based on appraised value of a property
  • A detailed property description
  • Interest rate, either fixed or variable
  • Repayment terms: amount, schedule, and method
  • Necessities for an escrow account, how it is managed, and for what purposes.
    • Escrow accounts are accounts that hold money for specific purposes. In the case of a mortgage, it could be necessary for collecting property taxes, homeowners’ insurance, and other property related expenses during the transition.
  • Prepayment penalties, if any:
    • Most mortgages have specific timelines of when and how you may pay them off. This including extra annual payments allowed. For any prepayments outside of the mortgage conditions, there may be additional penalties.
  • Obligations of the borrower:
    • Maintaining property in good condition
    • Paying property taxes
    • Having property insurance or mortgage insurance
  • Obligations of the lender:
    • How and when funds release
    • Providing statements and any other notices
    • Proper bookkeeping of payments and all transactions
  • Foreclosure and default conditions

Should you always read the fine print?

Yes, you should always read the fine print! This is especially true when it comes to financing agreements. If you don’t, there’s a chance something could happen down the road and you’d get dinged simply by not knowing what you signed off on. It’s better to know now and prepare, then to be blindsided later.

With that in mind, it can be tricky to understand the legal jargon within a financing agreement or otherwise. A financial advisor can help you understand the fine print. Connect with a financial advisor today!

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