It’s a Deal! How to Enter (and Exit) a Contract

Are you hesitant to sign a health club, car lease, or phone service contract? You have good reason to be – contracts are serious business. If you don’t pay according to the agreement’s terms, the original company may send the unpaid balance or penalty to a collector, or even take legal action. In either case, credit damage is both likely and severe. You can avoid such nasty consequences by entering – and exiting – contracts carefully. 

Before you sign
While sales tactics can be intense, never sign a contract under pressure. Take all the time you need to read and understand the document. Make sure you sign all parts of the contract, and never sign a blank document. For even greater security, you may have the paperwork first reviewed by a lawyer.

When a contract may be broken
Want to get out of the deal? Federal law (the Truth in Lending Act) and most state laws give you the right to reconsider certain contracts within three days of signing. This is often called the cooling-off rule. Some purchases, however, such as car loans and leases, real estate, insurance products, and securities are exempt from this rule, so be sure you are ready and able to fulfill the agreement before signing.

Still, even if the time frame has lapsed or it didn’t apply to your contract, you may break the contract under certain conditions:

  • You were forced against your will to sign
  • You lacked the mental capacity to understand it
  • The seller deliberately misstated the facts about the product or service
  • You were under 18 when you signed (in most states)
  • The terms are outrageous, or the bargaining process was thoroughly unfair

To break a contract correctly, write a letter (or use the contract cancellation form, if you were given one) stating your wish to cancel, and mail it to the address given for cancellation. Make sure it is post-marked before midnight of the third business day after the contract date (if you are using the cooling-off rule to break it). Keep a copy of the form or letter for your records.

When a contract can’t be canceled
So what happens when you can’t legally get out of your contract? Then you are bound by the terms of the agreement. For example, you may be held responsible for the remaining months’ cost of a gym membership or apartment rental lease. Break a car lease or a cell phone contract and you could be faced with a stiff penalty. Refer to the original contract that you signed (you kept a copy, didn’t you?) to know exactly what you are liable for if you end the deal prematurely.

BALANCE is a financial education and counseling service committed to helping individuals and families nationwide take control of their finances and reach their goals. To speak with a financial counselor about your personal situation, give us a call at 888-456-2227, or log onto