What’s a Car Loan Agreement?
An auto loan agreement is a legal contract, usually for a specified period of time and at a specified interest rate, that lays out the purchaser’s obligation to pay for a car over time. The contract also stipulates what will happen if payments are missed. The vehicle itself—and not the borrower or borrower’s personal property—is used as collateral for the loan.
For many people, a car is one of the largest purchases they make outside of a home, and as such, it can be difficult to pay for without financing. Typically, auto loans have terms of anywhere between three and seven years, although terms can stretch as long as ten years in some circumstances.
Some auto loan agreements may be for "no interest" loans other than the fees and costs rolled into the principal, known as "no interest financing . " These types of loans are not always a great deal, although the no interest option does result in substantially lower monthly payments. The buyer should carefully read the loan documents that the lender provides. Depending upon the wording of the loan agreement, "no interest" financing can end up being far more expensive than financing with a low interest rate.
Most times, the lender will be the entity behind the auto loan; however, independent financing companies sometimes provide financing options. Alternatively, condominium associations sometimes provide their members with $0 down, 0 interest, 0 monthly payment options using the association’s reserve funds.
Auto Loan Agreement Components
When you obtain an auto loan, you are entering into a legally-binding agreement with the lending entity. To ensure you know what the contract entails, as well as to avoid incurring any unnecessary fees or losing your vehicle, you need to have a clear understanding of the key components of an auto loan agreement. In most cases, the contract for your auto loan will contain the following elements: Loan Terms – The terms of your loan must be explicitly stated so that both you and the lender know exactly what you are agreeing to. This includes the amount you will be borrowing, as well as the interest rate and repayment schedule. Be sure to closely review the contract to verify that the loan terms are as you understand them and that there are no other unexpected terms included. Fees or Penalties – When reviewing your loan agreement, look for any fees you will incur as part of the loan. For example, you may be charged a fee for setting up the loan, which is sometimes called a "document fee." In addition, you should be aware of any penalties you could face by failing to fulfill the terms of the agreement or if you are late in making payments. These fees and penalties should be explicitly laid out in the contract you sign. Repayment – Another key component of your auto loan agreement is a description of how you will repay your loan. Typically, the loan will be paid in monthly installments until the total amount is paid off. However, be sure to review what your rights are should you wish to pay off the loan sooner than expected. Your auto loan agreement will of course contain more components than just these. Additionally, you may not even be able to recall the details of every clause outlined in the agreement, but it is still your responsibility to have a thorough understanding of the terms before signing on the dotted line. If you do not, you could be in for a rude awakening when it’s too late to change your mind.
Reading and Understanding Your Car Loan Agreement
Your auto loan agreement may be long and complex, but there are ways to make it easier to read and understand. There is no need to sit in your car and study this document for hours, trying desperately to make sense of it. If you know what to look for, the following tips and strategies will help you break your auto loan agreement down into easy-to-understand chunks:
Reading Your Auto Loan Agreement Start by looking at the main parts of your loan agreement. In other words, take a look at the beginning, middle, and end of this document, but ignore the little details in between at first. This will help you get a sense of the overall structure and organization.
Starting with the first few pages, check out the lender information, the procedural terms in the contract, and a summary of the repayment schedule. Once you have a basic overview of how much you’ll be borrowing, what the lender’s expectations are, and when your payments are due, it’s time to check your loan agreement again to confirm that everything is correct.
Next, go back and really consider the individual details of your auto loan agreement. Start by doing a close reading of the details: the RAN (also called an account or reference number), the APR (annual percentage rate), the total amount of your scheduled payments, and the amount financed.
The most important part of any loan agreement is the borrower’s payment obligation. Find the section containing your monthly payment to see how much you will pay every month for how long. Don’t forget to do the math to see if this amount fits within your budget.
The Last Word Your loan agreement is a legally binding contract. Before you apply, you should carefully read up on common loan terms and vehicle collateral agreements so that you know what to expect later. Once you have reviewed your auto loan agreement, you can sign on the dotted line.
Common Terms in an Auto Loan Agreement
An auto loan agreement contains provisions setting out the rights, obligations and responsibilities of the borrower to the lender. It will delineate both parties’ rights in terms of recourse should the other party fail to comply with the conditions of the agreement, as well as the process for resolving disputes between the parties.
There are several common terms which are used throughout the agreement which may not be familiar to you. Here are a few important ones:
- Default. Under most auto loan agreements, you are in default if you fail to comply with any of the terms of the agreement (e.g. failure to remit the monthly payment, bankruptcy, if your income or employment status changes). You may be in default if you do not maintain the automobile and/or pay all licencing and regulatory costs (e.g. taxes). If you are in default, the lender will have a right to terminate the agreement and recover the money owing from you. Your credit rating will also suffer as a result.
- Creditor. A creditor is someone to whom money is owed. A lender is usually considered a creditor because it has loaned you a sum of money which must be repaid, plus interest. Your obligation to repay the loan and the interest is called the "debt".
- Credit Report. A credit report is a record of your creditworthiness, which is typically maintained by a private credit reporting agency or the government. Credit reporting agencies are businesses that collect and report information about your debt repayment history. The most common credit reporting agency in Canada is Equifax.
- Property. In the context of an auto loan agreement, property refers to the ownership of the automobile. Generally, property includes both the legal and beneficial ownership of the automobile. Legal ownership will be maintained by the lender until the principal, interest and other fees are paid in full. At that point, the legal ownership will be transferred to you. You will also have the beneficial ownership of the vehicle as soon as you sign the document.
- Accelerated Payment. An accelerated payment is a step a creditor can take when you fall behind in your payments. When this happens, your creditor could add the delinquent balance plus any penalties to your regular payments, effectively accelerating the payback schedule. This will increase the amount of your monthly payments.
- Accrued Interest. Accrued interest is the sum of money which will have accrued by the time the interest period ends.
Car Loan Agreement Example
When it comes to auto loan agreements, the best way to review one is to break it into sections. In essence, by following an agreement section-by-section, it becomes easier to identify things that may be of concern, while also answering your questions as they come to mind. On the whole, a sample auto loan agreement looks like the following:
- The Parties. When dealing with loan agreements, most of the same rules that apply to contracts will apply. It is important to make sure the parties are properly identified, otherwise the agreement may be voided.
- Consideration. Consideration, usually financial, is the second most important aspect of a loan agreement. The bank or credit company is agreeing to extend credit, and you are agreeing to repay that credit within a certain time frame.
- A Description of the Vehicle. Often, dealing with description can seem redundant, but remember, this vehicle is the basis of the whole agreement . A mistake in this section could lead to processing and repayment issues down the road. Pay close attention to the identification numbers.
- Payment Terms. This is the part of the agreement that tells you how much the monthly payment is and how long you will pay on it. There are many variables that play into this, and this section may have a different view on the type of interest you are paying. If you have concerns about the interest you are being charged, read through this section to see if the numbers are correct.
- Default. In regard to loan agreements, default generally refers to not making payments or failing to insure the financed vehicle. Unless an insurance clause is placed in the insurance papers, this clause will be held as a supplemental understanding of the original purchase agreement. A default in payment can result in garnishments, repossessions and damages.
Negotiating Car Loan Agreements
When entering into an auto loan agreement, it’s important to understand that not every term is set in stone. Some terms are negotiable and you may work with the lender to arrive at a more favorable agreement. Negotiating in good faith may protect your interests and help you avoid costly mistakes. Here are some tips you might utilize when negotiating an auto loan agreement. Prior to negotiating an auto loan agreement, draft a list of terms that are important to you. Discuss these terms with the lender. Your goal is to find terms that are mutually acceptable, meaning that both parties feel as though they’ve benefited from the negotiation, regardless of who ultimately wins the negotiation. Consider the interest rate and the cost of the loan. The cost of the loan is the total amount of interest that you will pay over the life of the loan. Even a small increase in the interest rate can result in a significant difference in the amount of money you will ultimately pay. Always try to negotiate the lowest interest rate possible, even during difficult economic times—with favorable terms, the lender will often overlook a few blemishes on your credit report.
Car Loan Agreement Legal Tips and Resources
When entering into an auto loan agreement, it’s always a good idea to consult with a lawyer who specializes in consumer protection before signing the contract, especially if you see any red flags or anything you don’t understand. Principles of contractual interpretation may reduce the value of certain ambiguous clauses, but it is best to seek clarification with the lender or finance company before finalizing the transaction. You may have options to vary the terms or schedule of the contract, and if there is no mutual agreement, you may be able to walk away, or at least go ahead with the knowledge that you are taking a risk.
Consumer protection rights, available online and from legal professionals, empower consumers to make informed choices about their credit. When it comes to auto loans, you should always ask the loan administrator about your credit options, whether the credit report is available for review, as well as whether the administrator will address all questions about the contract, whether before or after signature. Keep in mind that banks and other companies that provide auto loans are obligated to act fairly, honestly, and in good faith , even when there is a dispute.
A common myth about standard auto loan agreements is that they are not negotiable. Although even those contracts which have been given on a "take-it-or-leave-it" basis may not be open to every point of negotiation, there is usually some flexibility. If you are savvy and educate yourself on the contract terms ahead of time, you probably have a good chance of negotiating improvements to the contract or lending process.
You can search the Internet or find a consumer protection lawyer to obtain the information you need to review your auto loan contract with a discerning eye. Information and resources shouldn’t ever be considered "legal advice" however, and particularly where mortgages or loans are concerned, it’s a smart idea to consult with a lawyer rather than rely on the lawyer’s blog or other pieces of legal commentary from the Internet. Be careful and know that although the auto loan industry is closely regulated, there is still great potential for you to lose money, or to owe more and take more time to finish paying a loan, than you had planned. Make sure you understand all of the details in the contract, including any fine print, and all possible fees and penalties associated with breach of the contract or other circumstances.