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Consideration is a money term you need to understand. Here’s what it means.

What is consideration?

In contract law, consideration refers to an item of value that the parties negotiate as a part of a contract. Consideration is a necessary component of all binding contracts.

Deeper definition

When you sign a contract, it must include consideration for all of the individuals or companies who are entering into the contract. Each party to the contract must benefit in some way.

Every person or entity that signs the contract must make a change to its behavior, such as:

  • Promising to do something that the person is not legally obligated to do.
  • Promising not to do something that he or she has the legal right to do.

You cannot apply consideration for actions that took place in the past. Since these actions originally happened outside of a contract, they do not count as consideration.

Actions that are illegal or overly immoral do not qualify as consideration since it is generally assumed you should not be doing these activities in the first place.

There is no stated value that an agreement must meet to qualify as consideration. Consideration is still present, even if it seems like one party to the contract is not getting a good deal. Unless information was intentionally withheld that caused the individual to fraudulently enter into the contract, it still qualifies as consideration.

Consideration example

If you have ever signed a contract or entered into an agreement, you have engaged in consideration.

For example, assume that you want to buy a home. You decide to enter into an agreement with a local builder. The builder receives money for the property, while you take ownership of your desired home. Both parties receive something of value; therefore, consideration is present in the contract.

Ready to see if your next financial contract is a good deal? Check out Bankrate’s financial calculators to make sure your next loan contract is a smart move.

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