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Candice Choi

Before you sign on the dotted line, know what it will cost to cancel the deal

By Candice Choi
Associated Press / January 8, 2010

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One number to look for in a contract? The cost of getting out. Early termination fees for cable service, cellphone plans, and other contracts generally offer escape doors from commitments for much greater amounts. Still, you may have assumed the penalty would be lighter, or that you could walk away if you had good reason. But a contract is binding, whether you find a better deal, lose your job, or run into financial calamity. Refusing to pay could result in bills going to collection, which is noted on your credit report for seven years. So before you sign, know what it costs to nix the deal.

How much to expect
You’re more likely to encounter termination fees when there’s a sale or promotion. The fees are how companies claw back any discounts that were given. For example, cellphone carriers usually offer steep rebates on phones if you sign up for a service plan. The termination fee is intended to recoup that money if you bail out early.

But the fee “should bear some relation to the actual cost that the company is incurring,’’ said John Villafranco, a consumer law expert.

Early termination fees are usually prorated, too, meaning they decline the further along in the contract you are.

When you can avoid a fee
There may be a grace period to avoid the termination fee. If so, know when it ends, so you can cancel in time, if needed. Some cellphone providers give you 30 days to cancel a plan without penalty. Otherwise, the termination fee at Verizon, for instance, can be as high as $350 if you have a smartphone.

You may also be able to avoid fees if there is a significant change in services. For instance, many consumers were upset when T-Mobile said it would start charging for paper statements. T-Mobile ultimately abandoned the idea, but it’s the type of scenario where you might have grounds to request a waiver on an early termination fee, Dworsky said. Contracts often contain language that allow companies to make minor changes, however.

When there’s no opt-out
If a contract doesn’t include a clause on early terminations, it generally means the company can demand the amount you would pay over the remainder of the contract. This is usually the case with car leases. However, you can often transfer your lease to someone else through sites such as TradeALease.com or LeaseTrader.com. The latter site handles all paperwork for you, but charges an $89 listing fee and another $149 fee for the actual transfer.

State laws may provide some protection. With apartment leases, for example, most states require landlords to try and rent out a unit before moving to collect what’s left on a lease.

In Massachusetts, you can cancel a gym membership if you move and there isn’t another gym within 25 miles.

Candice Choi is a personal finance writer for the Associated Press.