What Is A Car Loan Contract?
The car loan contract is a lending contract between a borrower (the one who borrows money) and a lender (who lends money) as part of the package for obtaining a specific loan. The sample contract should contain any relevant terms that must be adhered to by the borrower and lender throughout the life of the loan.
Many lenders require that a car loan contract be established before money will be loaned for the purpose of purchasing a new or used car. The contract is designed to protect both parties. If a borrower does not make payments in accordance with the contract, the lender has the right to repossess the car, as detailed in the contract . The lender should have the right to add any debt collection costs to the total amount due for the loan, which would be payable by the borrower in full.
In order for a borrower to receive a car loan, he or she must sign a car loan contract. That contract generally outlines information regarding the amount of the loan, how the loan will be paid and any rights of the lender with respect to the car if the borrower fails to make the necessary loan payments. In exchange, the lender will provide the borrower with a loan for the car he or she is seeking.
Components of a Sample Car Loan Contract
A typical car purchase loan often requires the following components:
Loan Amount: The amount of money the lender is willing to loan you to purchase the car.
Interest Rate: The additional amount of money the lender will charge you to borrow the loan amount. A lower interest rate means the loan will cost you less to pay back, while a higher interest rate will make the loan more expensive to pay off.
Term: The length of time you have to repay the loan to the lender. The longer the term, the lower your monthly payments will be, but the more you’ll have to pay in interest, as the lender isn’t required by law to charge the same interest rate for the entirety of the term.
Fees: Fees that may be associated with the loan, such as an origination fee, closing costs, a loan processing fee, an application fee, an assignment fee, or a dealership fee.
Penalties: Fees that may be charged if you are late in making a payment or miss a payment, as well as penalties for paying off the loan ahead of schedule (only applicable with simple interest loans).
How To Review A Sample Car Loan Contract
Step 1: Gather your paperwork
Make sure you have all of the necessary paperwork to hand so you don’t need to get up and leave the contract incomplete.
What do you need? You should have some basic information that you will need to enter into the loan contract, including:
Your name
Your address
Your social security number
Your monthly income
The trade-in value of your car (if applicable)
A bill you received in the past 60 days – this should contain your name and address and you will be asked for this to confirm your identity.
Additional documentation may be needed by the lender, so always bring as much as possible with you.
Step 2: Read every line
Sounds like something that shouldn’t have to be said, but it’s true. Even the slightest addition to or omission from your contract can mean you are paying thousands of dollars more over time.
Step 3: Read again
Before signing, take the time to read the contract once more to make sure you understand it completely. Does it all make sense? If not, don’t sign it – the contract can not be adjusted later if the loan has already been finalized and completed.
Step 4: Take note of anything different
Don’t be afraid to ask about anything that is unclear. Make sure that everything you had previously agreed upon verbally or via email with the lender is present in the form you now have. Should something sound or feel wrong, you have a legal right to request an adjustment.
Step 5: Ask questions
Once you have read the entire document, ask questions and request clarification on anything you don’t understand. Your lender should be willing to take the time to explain every single term so that you have a complete understanding of the contract.
If they refuse, move on. There are many qualified lenders out there who will take the proper amount of time to clearly explain everything, putting your mind at ease.
Step 6: Get everything in writing
Any promises made verbally outside of the agreement should be written down and stapled or clipped to your contract.
These final steps should confirm what you initially agreed on and ensure your understanding of everything contained within the contract.
Common Terms Found In Car Loan Contracts
Among the most prominent clauses in a car loan contract are those that address prepayment, default and late payment.
Prepayment Clause
A prepayment clause governs the ability of the borrower to pay off the loan in full before it has expired, often with the possibility of a reduced total interest. Most lenders will permit prepayment, without penalty, but not all. Under California law (Civ. Code section 2982), an auto finance contract may only contain a prepayment clause if the maximum prepayment charge is 0.75% of the unpaid principal balance, or if the prepayment charge is shown on the first page of the contract.
Default Clause
The default clause explains what happens if the borrower fails to make a timely payment or otherwise fails to comply with a specific term in the contract. A default does not automatically result in repossession. Generally, the lender must send the borrower a letter explaining the specific ways in which the borrower is in default and giving the borrower a specific amount of time to comply with the contract terms.
Late Payment Clause
A late payment clause specifies how much interest and/or penalty is charged when the borrower fails to make a timely payment.
Different Types of Sample Car Loan Contracts
In reviewing a car loan contract sample, it is important to recognize the need to find a competitive interest rate and affordable repayment terms. Comparing multiple car loan contract samples can help borrowers determine which car loan offers make the most sense. In some cases, borrowers may be able to get a lower vehicle loan interest rate, resulting in saving substantial amounts of money over the life of the loan.
When comparing car loan contract samples, it is a good idea to evaluate the following aspects of the contract:
• Lender: Where can you get the best overall rates and financing options?
• Amount Financed: Can your needs be met by the amount offered through a specific lender?
• Amount Due at Signing: Is the amount due at signing , which may include a down payment, an acceptable amount?
• Monthly Payment: What is the cost per month to pay off the vehicle?
• Annual Percentage Rate: What will you pay in interest over the course of the vehicle loan contract?
• Amount Financed: Is your current vehicle trade-in or down payment sufficient to cover your monthly payments, as this is a primary element of the car loan contract?
• Total Payments: What will the total amount paid for the loan be if the borrower accepts the given terms?
Integrating these aspects of the car loan contract sample with an applicant’s own financial situation can make it possible to identify which contract will forego financial difficulties down the road.
Legal Aspects of a Car Loan Contract
The law requires lenders to provide borrowers with a written agreement that explains the basic terms of the car loan, interest rates and any fees charged. Not only must lenders present the borrower with a copy of the agreement before signing, the law also requires that all signed copies be kept in a convenient location and be available for the borrower’s examination.
The Truth in Lending Act (TILA) covers lending agreements. Specifically, TILA requires lenders to inform consumers of credit terms in a clear and understandable way. This includes information about the annual percentage rate (APR), the terms of the loan and how the APR is computed. Basically, any precomputed debt must show how much money the borrower has saved in finance charges, which include interest.
During the first 4 pages of the Truth in Lending Disclosure Statement, the lender is required to explain certain essential information about the loan. These disclosures include:
- (1) the principal amount of the loan;
- (2) the amount financed;
- (3) the finance charge;
- (4) the APR;
- (5) any fees charged by the lender and other charges necessary to obtain credit;
- (6) the total of payments;
- (7) the repayment period;
- (8) the monthly payment amount;
- (9) a description of each payment including the number of payments, amount of each payment, the due dates, the amount of any balloon payment, and an explanation of how to make payments;
The U.S. Department of Justice enforces TILA, and a few other federal agencies enforce this act. State laws provide for different remedies for violations of the Truth in Lending Act. Specifically:
- (1) the amount of damages;
- (2) the extent of economic damages allowable;
- (3) the availability of a right to rescind to the consumer;
- (4) the length of the statute of limitations;
- (5) judicial remedies;
- (6) procedures governing administrative enforcement;
- (7) judgment recovery;
- (8) remedies not specified by federal law;
- (9) all defenses allowed against a creditor;
- (10) confirmation, in writing, of the assignment and transfer of the right to receive payments;
and
(11) a waiver by the obligor of defenses to payment in a consumer credit transaction, except a waiver of the right to assert defenses that are given by federal law in an action or proceeding against the obligor.
Negotiating for More Favorable Car Loan Contract Terms
It is important to understand all the car loan contract particulars, especially the impact that the interest rate can have on the overall cost of the car. Not only does the interest rate dictate how much good or bad credit will affect the price of the car, but will also dictate when a borrower can afford to pay off the vehicle.
Borrowers may want to visit their lender to see if there is room for negotiation to improve the overall terms of the car loan. Here are some options for borrowers to consider:
If the borrower is paying far more than is customary, it doesn’t hurt to ask for lower monthly payments and a lower interest rate. A finance manager at a car dealership may very well say yes, considering a lender makes money on the high end. It may be necessary for the borrower to call in an attorney to negotiate on their behalf, however it’s often possible to negotiate with just an intermediary. Borrowers are always strongly encouraged to read a full contract before signing their name to anything, but where is there room to improve the terms?
Resources for Car Loan Contract Samples
Financial institutions that offer auto loans will often provide sample contracts that reflect the documents they use with applicants. In many instances, banks, credit unions, and dealerships provide sample contracts on request, either by mail or email, or may allow applicants to view these documents on the bank’s website, before the applicant submits an application for financing. Some lenders and dealerships will even give prospective borrowers a booklet that holds all of the loan forms used by the lender, including the car loan contract. All of these banks and lenders issue car loan contracts in a relatively standardized format. In addition to using sample car loan contracts from lenders and dealerships , there are several online auto financing websites that provide sample contracts for auto loans. Many of these websites also have an online car loan calculator, so the online respondent can play with specific loan figures and terms to gauge what type of contract will offer the best financing options for a new purchase. Finally, attorney and paralegal websites that address issues like consumer credit and debt are also good sources for sample car loan contracts, as they nearly always have downloadable samples of most financing documents issued by banks, credit unions, and dealerships.