What is a Vehicle Loan Agreement?
A vehicle loan agreement is a legally binding document that outlines the terms and conditions under which a borrower agrees to repay a loan taken out to purchase a vehicle. The lender, who is typically a financial institution or a car dealership, provides a specific amount of money to the borrower to purchase a designated vehicle, and in turn, the borrower promises to make regular payments over a set period to repay the loan with interest. The purpose of such an agreement is to protect the lender’s investment in the vehicle while giving the borrower the opportunity to finance their purchase and make the repayment feasible over time.
The agreement details the total amount of the loan, including the specified interest rate, loan term , payment schedule, and consequences for default such as repossession of the vehicle. It also outlines the rights and obligations of both the lender and the borrower regarding the use and maintenance of the vehicle. For the lender, the agreement provides the ability to secure their interest in the vehicle against default on the loan, while for the borrower, it enables them to access a needed asset without having to pay the full purchase price upfront.
In a vehicle loan agreement, the loan agreement may be coupled with a security agreement and a purchase agreement. The security agreement gives the lender a security interest in the vehicle through a loan. The purchase agreement formalizes the buyer-seller relationship between the buyer and seller.
Essential Components of a Vehicle Loan Agreement
When it comes to financing a vehicle, the foundation of the transaction is the vehicle loan agreement itself. A vehicle loan agreement is much like any other consumer loan agreement and should cover the following fundamental components:
Interest Rate: The interest rate on a vehicle loan can be fixed or variable. Nowadays, when vehicle financing has become quite competitive, it is not uncommon to get an interest rate lower than if you were to borrow for other purposes. For instance, if the prevailing rate for other loans is 9% and you’re offered 8%, that is certainly a good deal. If you have great credit and are a loyal customer of the bank, you may be able to do even better. Be careful, though, that a lender doesn’t offer you an attractive rate only to hit you with outrageous fees and charges that really make the cost comparable to any other loan.
Loan Term: The repayment term can be any period of time; however, most vehicle loans are between 48 to 60 months. In some cases, a longer term can make sense because that longer term allows for a smaller monthly payment but make sure it does not translate into a higher interest rate. The term of the loan is often one of the biggest issues in a loan agreement. A bank wants your business and may not press you too hard on a particular term, but you should not be afraid to push back to get a better deal.
Monthly Payments: The monthly payments on a vehicle loan are usually fixed and are calculated by the bank at the time the loan is taken out. It’s impossible to predict the future but a vehicle note should be structured to protect you from excessive rate increases. Make sure the terms of the loan protect you from rate jumps due to late payments or missed payments. On the front end, be aware of rises in your interest rate and make sure that the monthly payment you negotiated is clear. Your monthly payment should be clear and easy to understand.
Default Conditions: The lender will always define the default conditions. A bank loan is unsecured, meaning there is no mortgage or other security for the bank to immediately seize and sell if you have difficulty making the payments. Because of this, you should approach your bank with significant caution. If you miss a single payment, take great care in communicating with the bank. If you used an intermediary or broker to negotiate your loan, have them represent you in any communications with the bank. Be careful not to place your "deal" still in jeopardy by being careless with the bank.
Categories of Vehicle Loan Agreements
If you’re taking out a vehicle loan, there’s a good chance that you don’t know just what type of loan you’re getting into. There is no shortage of vehicles out there that seems to have been sold as a result of a failure to understand what you’re getting into.
This is especially relevant when it comes to vehicle loan agreements, and in particular secured and unsecured vehicle loans, as well as those with fixed or variable interest rates.
Secured Loans
Let’s start with secured vehicle loans. When you take out a secured vehicle loan, you’re agreeing to give your lender the right to take possession of the vehicle if you fail to meet your end of the bargain within the loan agreement. In order for this to happen, the vehicle must be subject to a security interest through a written security agreement.
The major benefit of secured vehicle loans is that they do generally come with lower rates than unsecured loans, as the lender is ensured a way of getting repaid even if you default. Of course, the trade-off is that the lender has the right to recover the vehicle without going through the court system in order to protect their collateral.
Secured loans for vehicles are undoubtedly the most common form of vehicle loan agreement, but you will not find these agreements free of risks. If you fall behind on monthly payments, the lender may repossess your vehicle. From there, you will be required to pay back the difference between the loan’s value and what the lender ultimately gets for the vehicle.
Unsecured Loans
So how about unsecured vehicle loans? Unsecured loans will generally feature higher interest rates than their secured counterparts because the bank is risking its own money with no physical collateral to rely upon. Because of this, unsecured loans will often require securing a co-signer who does offer some kind of collateral.
These loans provide a way to obtain financing for individuals who otherwise would not be able to secure an auto loan. An unsecured loan also scrubs the hassle of dealing with a lienholder to regain possession of your vehicle once your vehicle loan is paid off.
But make no mistake: You do not want to default on an unsecured vehicle loan, as the lender has every right available to them by law to get their money back. They will likely pursue a debt collection lawsuit against you, which will increase your costs and ultimately decrease your credit score if you cannot pay the judge’s award in full.
Fixed Interest Rates
A fixed interest rate vehicle loan agreement locks in a consistent monthly payment for the life of the loan. And when interest rates are low, you could save a lot on your monthly payments by locking in your current rate.
Another benefit of a fixed-rate loan is that your payment will not have any room for fluctuation, meaning you’ll know exactly what you owe every month.
But the downside of a fixed loan is that if interest rates drop, your rate will remain constant until you repay the loan completely. Therefore, if rates plummet, you will not be able to enjoy those savings. Additionally, if rates rise, you could be stuck with a higher payment until the end of the loan term.
Variable Interest Rates
As the name implies, a variable interest rate loan delivers an interest rate that will vary over the life of the loan. While the bank does not make money until profits come, they do think it’s a "fairer" deal for the borrower for the same reason it was the right thing to do to bail out the banks during the last downturn. But the schedule of profit takes a while to cover the losses, so they charge a higher interest rate.
Most variable interest rates tend to be higher than their fixed counterparts, meaning you’re going to pay more in interest with these loans. It also means your monthly payment will fluctuate from month to month. This means you need to set aside some of your savings to cover a higher payment so that you don’t default on your loan.
Unfortunately, you’re also going to struggle with the fact that all unsecured loans are variable rate, so it’s hard to find a good loan that covers both the fixed and unsecured parts. Sometimes it’s better to search harder and longer than to sign the first contract in front of you.
Negotiating a Vehicle Loan Agreement
When it comes to negotiate a vehicle loan agreement, there are a few key strategies to keep in mind. The most important step is to do your homework about your credit score and be sure that is as high as possible. The best interest rates and terms will only be available to those with the highest credit ratings. If your credit rating has room for improvement, it might be best to wait a few months before purchasing a new vehicle.
Once you know your credit score, you should make sure that you are getting the best interest rate possible on your auto loan. Shop around with different lenders and check their loan rates. A number of websites allow you to compare the terms of various loan products from various lenders. They also have online calculators that can help you determine how the loan terms will impact the total price of the vehicle. Use these resources to determine which lender is offering the best rates and terms.
Be sure to read the fine print of any loan agreement to ensure that there are no hidden fees or other surprise charges. Because auto loans are secured by the vehicle, in the event of a default the lender can repossess the vehicle. Most lenders are willing to negotiate some of the terms of the loan, such as the interest rate or other fees.
Finally, make sure to understand all of the terms of the loan before signing the agreement. Terms such as APR, security interest, loan period, and default must all be understood to avoid any confusion down the road.
The Law and Vehicle Loan Agreements
When entering into any vehicle loan agreement, there are various legal considerations that a borrower should be aware of. First and foremost is the consideration of consumer protection laws. These rules apply at the federal and state levels and address issues relating to unfair or deceptive practices in order to protect consumers. One prominent federal statute that protects consumers in vehicle loan transactions is the Truth in Lending Act (TILA).
At a minimum, TILA requires creditors (lenders) to provide borrowers with disclosures about the cost of the loan. Under TILA, the lender is required to disclose the amount financed, interest charges, total payments, payment schedule, the right to cancel, as well as the cost of credit insurance, if applicable. A key aspect of this act is that it is often enforced by private individuals. This means that an individual can secure damages and attorneys’ fees from a lender for a failure to comply with TILA. As such, TILA allows consumers to recover what they were owed in the first place, and then some. This is significant because there are statutes of limitations that apply to the enforcement of other written contract terms in vehicle loan agreements. TILA, however, has a four-year statute of limitation.
For example, if a lender fails to provide the required disclosures to the borrower under TILA, and the borrower defaults on the loan, the lender may only be able to enforce the loan terms going forward. However, the borrower could be entitled to past overpayments of interest and attorneys’ fees. If a lender fails to comply with TILA for failing to properly disclose the interest rate , the borrower may be able to recover the money overpaid in interest.
Another major federal law that encompasses vehicle loan contracts is the Fair Credit Reporting Act (FRCA). The FRCA allows borrowers to take action against a credit reporting agency or creditor that reports false information on a credit report. If such false information causes a borrower to be denied credit, housing, insurance, or employment, then the borrower may be able to recover damages. Again, if successful, a consumer may also be able to recover attorneys’ fees and costs.
Additional state consumer protection laws may be relevant as well. For example, in many states, a buyer may affirmatively waive their right to contracts and contract terms that would otherwise void the contract. A viable waiver will be conspicuous and obvious to the signer. However, if the waiver is in fine print or if the borrower was unaware of such waiver, then a court may still find that the waiver was unenforceable.
It is also important to consider recourse options when a lender fails to comply with applicable laws or the terms of a vehicle loan agreement. Primarily, a borrower may have damages that can be enforced in a court of law. At the same time, a borrower may wish to resolve the dispute prior to resorting to litigation.
The first level of resolution is through a demand letter to the lender or creditor, which details a borrower’s claims. It is important to remember that these letters should be sent through an attorney to protect a borrower’s rights. An attorney may also assist in negotiations with lenders.
If negotiation efforts fail, a lawsuit may be appropriate. However, even after a lawsuit is filed, most courts will refer the dispute to arbitration, which can be less time consuming and expensive than litigation. If a borrower is successful in their claim against a lender or creditor, they may be entitled to compensatory damages, consequential damages, punitive damages, and attorneys’ fees.
Frequent Pitfalls in Vehicle Loan Agreements
When it comes to vehicle loan agreements, many borrowers make common mistakes that can end up costing them money and endanger their vehicles. It’s important for vehicle purchasers to educate themselves on some of the pitfalls before agreeing to the terms of a vehicle loan agreement.
A common mistake that borrowers make is not reading the fine print of the vehicle loan agreement. Some purchasers are just so excited about their new vehicle that they sign whatever paper is put in front of them without reading the fine print. Unfortunately, this decision can come back to haunt borrowers. Failure to read the fine print, whether on the loan agreement itself, or the terms and conditions that are incorporated by reference into the loan agreement, can result in borrowers unknowingly waiving important rights. Know what you are signing when entering into the vehicle loan agreement.
Another common mistake is agreeing to unfavorable terms. Anytime a purchaser finds him or herself agreeing to unfavorable terms in a vehicle loan agreement, it is important to take a step back and ensure that the agreement does not contradict state or federal law. For example, no state allows vehicle loan agreements to give lenders the unilateral right to repossess a vehicle without notice. Some vehicle loan agreements have been known to contain such terms. Be aware before you sign that you are your lender’s equal in negotiating the vehicle loan agreement.
Aside from the above-mentioned common mistakes, you also do not want to find yourself being fooled by some of the more unusual terms of vehicle loan agreements. While failing to read the fine print can result in you waiving important rights, failing to recognize strange terms can also have the same effect. Be aware that vehicle loan agreements sometimes carry provisions incorporating various state laws which may not be apparent at first glance. Be sure to look closely at all of the provisions of the loan agreement to ensure that you are not giving up any important rights as the purchaser.
Vehicle loan terms can be confusing, but it is essential that vehicle purchasers use their due diligence and research before signing the dotted line on a vehicle loan agreement. Before signing the vehicle loan agreement, it’s important to ensure that the agreement contains favorable terms and does not contain any unusual terms or provisions that could be in violation of state or federal law.
Protecting Yourself in Vehicle Loan Agreements
As with any contract, the law requires that for a vehicle loan agreement (or any contract) to be enforceable, both of the following must be in effect:
1) The contract has to be reasonably clear and understandable, and
2) The contract has to contain the basic elements necessary for an enforceable contract.
Therefore:
1) Make sure you fully understand what is being agreed upon. Make sure that you know exactly the terms that you are agreeing to. If there is any part of the agreement that you do not understand, ask the lender for clarification.
Here are a few key points to clarify prior to signing a vehicle loan agreement:
· Amount Financed
· Down Payment
· Interest Rate
· Monthly Payments
· Term of Payments
· Types of Fees
· Loan Pre-payment Policy
· Default Policy
- Make sure you are reading the "fine print" in the agreement. A lot of times, the bulk of the terms of a vehicle loan agreement is in the "fine print;" therefore, you should read it very carefully .
- Make sure you understand the lender’s policies. While most lenders’ conduct is governed by state law, certain aspects of their conduct are subject to their own policies (which may or may not be in compliance with the state law); therefore, inquire as to the lenders’ policies so that you know how to protect yourself.
- If the lender makes any representations about the loan agreement, make sure that they are in writing in the contract. If you are not able to get it in writing, obtain a recording of the representation. Most states allow for recording conversations as long as at least one party to the conversation knows that the conversation is being recorded (and you are fully advised of this policy in your state). For instance, if the lender agrees to lower the interest rate if you make your payments on time for the first three months, make sure that the lender agrees to this in the written vehicle loan agreement. If not, make sure you record your telephone conversation with the lender.