A school teacher in Georgia has won $10,000 from a hidden contest buried in her insurance policy’s fine print, CBS reports. Spurred by a dedication to “always reading the fine print,” the teacher was shocked to find instructions to claim her reward. What can reading the fine print do for you?
Donelan Andrews recently bought travel insurance for a trip to London she plans on taking with her friends this September. She bought her policy from Tin Leg Insurance, a subsidiary of Squaremouth. Andrews said she has always made a point of reading the fine print of any contract, policy, or agreement into which she enters—and encourages her students to do the same. As she concluded her read-through of her new travel insurance contract, she found a congratulatory message from Squaremouth’s top-secret “Pays to Read Campaign,” stating that the first person to follow the redemption instructions in the fine print would earn a $10,000 check. What else is hidden in those tiny terms of service?
Understanding a Promissory Note
How do we define a promissory note? “As its name suggests, it’s a contract in which one party is promising to transfer something of value to another party at some future date, presumably in exchange for something of value today,” said Dr. Connel Fullenkamp, Professor of the Practice and Director of Undergraduate Studies in the Department of Economics at Duke University. At its most basic level, a promissory note features three major components.
The first section of a promissory note describes what’s being promised. For example, in a car loan, this would describe the make, model, and condition of the vehicle. Then, it would detail the price, agreed-upon monthly payments, interest rate, and number of payments until the contract is fulfilled.
The second section, and often the largest, is a section of covenants. “Covenants are additional conditions that one party requires the other to fulfill as part of the overall contract,” Dr. Fullenkamp said. “They’re additional promises that one party makes to the other—usually it’s the borrower making promises to the lender.” There are positive covenants and negative covenants. Positive covenants require a specific action to be taken by the borrower, like overturning financial information to keep the lender informed of the borrower’s ability to repay the loan. Negative covenants are actions the borrower must avoid, like crossing a specified debt-to-income ratio.
The third, and perhaps simplest, section of a promissory note specifies enforcement of the contract. To use the example of a car loan, the enforcement section outlines what happens if the borrower stops payment on their loan, like late-payment penalties.
The Truth in Lending Act
In 1968, Congress passed the Truth in Lending Act, which dramatically simplifies loans made to individuals. “The Truth in Lending Act requires lenders to disclose, on one sheet, many of the key requirements of the loan, using language that’s easy to understand,” Dr. Fullenkamp said. “In addition, regulators urge lenders to use plain English in their contracts whenever possible. So, most contracts that you’ll encounter are surprisingly easy to read and understand.”
Disclosures in loans break down all three sections of a promissory note into simple terms. It lays out all the numbers involved, even including late fees and interest rates. The Truth in Lending Act also requires lenders to list the annual percentage rate (APR) of the loan. “This requirement came about because there are actually lots of different ways to quote interest rates, and the law requires every lender to use the same way, so that borrowers can easily compare interest rates across lenders,” Dr. Fullenkamp said.
Most loans and contracts are unlikely to contain a $10,000 prize in their fine print. However, consumers can save a lot of money and a big headache by being able to interpret any contract, loan, agreement, or policy that comes their way. With the help of regulations like the Truth in Lending Act and the basic understanding of the primary components of a promissory note, consumers can start off on the right foot.
Dr. Connel Fullenkamp, Ph.D., contributed to this article.
Dr. Fullenkamp is Professor of the Practice and Director of Undergraduate Studies in the Department of Economics at Duke University. In addition to teaching, he serves as a consultant for the Duke Center for International Development.