Contracts are often filled with legal terms the average person can’t understand without a lawyer. That’s not necessarily a bad thing. A solid contract written by a good lawyer will use complex legal terms correctly, making the contract more likely to be enforced according to its true intentions.
Whether you’re the sender or recipient of a contract, knowing these aspects of a contract will save you from making the wrong assumptions:
1. Interest rate vs. APR
Many people end up paying more to their credit card company than expected because they focused on the interest rate rather than the annual percentage rate (APR). Every loan comes with an interest rate as well as an APR. The APR is often higher than the interest rate. Here’s why:
An interest rate, according to Investopedia, “refers only to the interest charged on a loan, and it does not take any other expenses into account.”
An APR, on the other hand, is the total yearly rate a lender charges for borrowing money. This rate includes all fees associated with the loan, except for compounding. For example, the APR can include the interest rate, transaction fees, and late penalties.
By law, lenders are required to make their APRs public, so people know what their bottom-line cost will be. Although some APRs are fixed, others are variable and can change at any time.
Knowing these terms is even more important with bad credit
When you’re trying to get a loan with bad credit, understanding the difference between “interest rate” and “APR” can save you from surprises that would otherwise add to your debt.
While comparing interest rates is important, knowing the APR allows you to accurately compare rates from different lenders before you apply.
To find your true cost when comparing bad credit loans, you need to know the APR as well as the loan term for repayment. You’ll also need to know if there are any fees for repaying your loan early. Then, you can crunch some numbers to see what the loan will actually cost you.
For instance, say you only need to borrow $20,000. You might find two lenders that offer you the same APR; one with a minimum loan term of three months and the other with a 12-month minimum term. If you accept a loan from the lender with a 12-month minimum term and want to pay off your loan sooner, you’ll likely end up with a penalty fee.
2. Restrictive covenants like non-compete and non-disclosure
Each year, people sue each other for what they perceive to be a breach of contract, only to be disappointed when the judge doesn’t rule in their favor. It doesn’t seem to make sense. When someone violates terms they clearly accepted, why wouldn’t a judge hold them to their agreement?
The answer is that courts don’t look at restrictive covenants the way people do. For example, a court that hears a non-compete case is largely concerned with whether the terms of the contract are reasonable. The terms need to be established as reasonable before the court will consider anything further.
According to one lawyer, there are at least eight points that can be used to challenge a non-compete agreement. These include being asked to act illegally by your former employer, not having had access to proprietary information, unreasonable terms, a breach of employment contract, being tricked into signing, and having never signed an agreement at all.
Contracts aren’t automatically enforceable
David B. Ritter, a lawyer from Chicago, spoke with SHRM Online about the enforceability of this type of agreement. He points out that a restrictive covenant, such as a non-compete agreement, needs to be supported by adequate consideration. That’s legalese for an exchange of value. Nobody can ask you to sign such an agreement without providing you with something extra in return.
“In some states, providing a job or continued employment is sufficient,” Ritter states. “In other states, it is not adequate consideration if the employee is employed “at-will.” In such a case, an employer should have the employee sign the restriction when being promoted or receiving a bonus.”
Still, Ritter makes it clear that restrictive covenants that are “reasonable in terms of time and scope” have a better chance of being enforceable. Some states allow a restriction of up to three years, while others allow for only one.
For your protection, make sure any contract you ask someone to sign contains reasonable terms. If not, you risk having the whole agreement deemed invalid by a judge.