Motor vehicle financing overview
When you get a motor vehicle loan you receive funds from a lender and pay that lender back over time with interest. The contract you sign stipulates all aspects of the agreement including the interest rate, payment amount, and payment frequency.
Where to get a motor vehicle loan
- Banks and credit unions, including both state and federally chartered banks and credit unions, will generally offer auto loans. The DOB encourages you to consult with your financial institution during the process of shopping for an auto loan or during the pre-approval stage. Banks and credit unions typically do not present a high pressure environment and may offer more competitive costs.
- Non-Bank Lenders, including large auto dealers and small lenders targeting the sub-prime market, must be properly licensed by the Division of Banks.
- Dealerships, often include a number of various licensed lenders to choose from. Dealerships often are able to provide financing on the spot.
- Buy Here Pay Here Dealers, tend to be small, used auto dealerships catering to the subprime credit market. Subprime lending at buy here pay here dealers may carry high interest rates and fees.
- Servicers, are the entity conducting the process of billing and collecting loan payments. A servicer is generally not the same party as the loan originator or loan owner.
Motor vehicle loan contracts
All motor vehicle loan contracts should specifically outline the interest rate, annual percentage rate, finance charge, late fees, default of contract conditions, and insurance or other contract requirements.
- Interest Rate, is the annual percentage you will pay based on the original amount (principal) of the loan.
- The most common way motor vehicle loan interest is calculated is by using the Simple Interest Method. Simple interest is determined by multiplying the interest rate by the principal by the number of payments.
- Annual Percentage Rate (APR), is the total average cost of the loan including all finance charges and the interest rate.
- APR is capped at a maximum of 21% in Massachusetts. This means the interest rate, with any additional finance charges added to it, may not be higher than 21% for an automobile.
- Finance charge, is any charge required to be paid as a term of the loan, which may include interest rate, application fees, filing fees, etc. There are no limitations on finance charges long as finance charges are truthfully disclosed on the contract.
- Late fees, must be explained in the contract.
- According to Massachusetts General Laws Chapter 255B § 11, the late payment fee must be lesser than $5 or 5% of the late payment.
- Default of contract conditions, include any breach of contract. All conditions that trigger a default must be explained in the contract.
- Common examples of default conditions include failure to maintain adequate insurance coverage or being 10 or more days late on an agreed upon payment.
Insurance and other contract requirements, must be truthfully disclosed in the contract. For example, motor vehicle contracts may require full auto insurance coverage as a condition of credit.
Motor vehicle financing terms to know
- Amount financed, is the dollar amount of the credit a borrower is provided.
- Assignee, is the bank, credit union, or finance company that buys the contract from the dealer.
- Credit insurance, is optional insurance that will pay the remaining balance if the consumer dies or becomes disabled. The cost of optional credit insurance must be disclosed in writing and agreed to in the motor vehicle loan contract.
- Credit report, contains the consumer's credit score and additional information used to make credit decisions. A credit report will include the credit score, address, payment history, bankruptcy filing, and public records.
- Credit score, is a number that reflects a consumer's present credit risk based on information in a consumer's credit report. The better a consumer's history of credit, the higher the credit score. A consumer's credit score may be used to help decide the rate and other terms of the loan offered.
- Default is the failure to abide by the terms of a loan agreement. The most common reason for default is failure to make payments on time or failure to maintain required insurance on a vehicle. A loan is in default if a payment if one day late. A lender cannot initiate the repossession process by issuing a Right to Cure notice to the borrower until the loan is at least 10 days in default.
- Down payment, is the initial amount paid by the consumer to reduce the amount financed.
- Extended service contract, is optimal protection on specified mechanical and electrical components of the vehicle. An extended service contract would supplement any warranty coverage provided with the vehicle.
- Finance charge, is any charge required to be paid as a term of the loan, which may include interest rate, application fees, filing fees, etc. As long as finance charges are truthfully disclosed on the contract, there are no limitations on finance charges.
- Fixed rate financing, is financing where the rate remains the same over the entire term of the loan agreement.
- Guaranteed Auto Protection (GAP), is optional protection which will pay the difference between the amount owed on the vehicle loan and the amount recovered from an insurance company should the financed vehicle be stolen or destroyed before the consumer has paid off their credit obligation.
- Monthly Payment Amount, is the dollar amount due each month on the motor vehicle loan, finance contract, or lease agreement.
- Negative equity, is the amount owed on a vehicle above its market value. For example, if the vehicle loan payoff is $18,000 and the vehicle's market value is $15,000, the negative equity would be $3,000.
- Negotiated price of the vehicle, is the purchase price of the vehicle agreed upon by the buyer and seller.
- Repossession, is the act of a lender taking back the loan collateral when the consumer has defaulted on the vehicle loan agreement. In the case of a motor vehicle loan, the collateral is the vehicle.
- Total of payments, as disclosed on the vehicle loan agreement is the total amount a consumer will have paid by the end of the agreement.
- Variable rate financing, is financing where the finance rate varies and the amount paid changes over the life of the agreement. This type of financing is uncommon in motor vehicle finance transactions.
Protect yourself when shopping for a motor vehicle loan
- Shop around when looking for financing:
- Banks and credit unions offering auto loans typically do not present a high pressure environment and may offer more competitive rates and/or terms.
- Non-Bank Lenders, including Buy Here, Pay Here auto dealers, must be properly licensed by the Division of Banks. Verify licensure before committing to a loan.
- Auto Dealerships often arrange financing on the spot through various licensed lenders, banks, and credit unions. Dealers may have a financial incentive to finance a loan using certain lenders and are not required to seek the lowest interest rate for your loan.
- Check your credit history independently before shopping for a car to make sure it is accurate. You are entitled to one free copy of your credit report per calendar year from each of the three major credit reporting bureaus. Consider requesting a copy every year to ensure it is free from error.
- Before signing a motor vehicle sales finance agreement with a non-bank lender, verify the company is licensed by the DOB to lend in Massachusetts.
- Verify licensing by using the DOB's approved licensee portal or using the NMLS.
Repossession is the act of a lender taking back the vehicle securing the loan the borrower has defaulted. Massachusetts is a "Right to Cure" state, meaning that as a borrower you are protected from repossession during a certain period of time. The DOB enforces the Right to Cure related to motor vehicle loans in Massachusetts.
- Right to Cure related to motor vehicle lending requires lenders to follow a process before acting in the event of a loan default.
- The day a motor vehicle loan contract is in default the Right to Cure process begins. In 10 days or later the lender must send a Right to Cure Notice to the borrower in default.
- Consumers are given 21 days to bring the loan current during the Right to Cure period. If the loan is brought current (cured) servicing continues as normal. If the loan stays in default throughout the Right to Cure period, the lender may repossess motor vehicle used as collateral on the loan.
- Lenders may not activate a GPS interrupt device until the Right to Cure period has expired.
If a borrower cures a default after notice 3 or more times, the lender is no longer required to issue a cure notice, and may take action against the collateral immediately upon default.
Repossession terms to know
- Starter Interrupt Device, is a device installed on a vehicle by a dealer or lender allowing the lender to disable the vehicle remotely in the event of a loan default. These devices often have GPS tracking built in to allow the dealer to easily locate and repossess the vehicle. Some dealers require the installation of a starter interrupt device as a condition of credit for borrowers with poor credit histories. Lenders cannot disable a vehicle without following the proper Right to Cure procedures.
- Acceleration, is a lender's ability to require a borrower to pay off the full loan amount immediately, including any interest due and reasonable repossession charges, prior to the maturity date of a loan. A lender may not accelerate the loan balance during the Right to Cure period, and must notify the borrower before doing so.
- Right to Redeem, means the consumer may redeem the collateral from the holder within 20 days of the creditor's taking possession of the collateral by paying the total amount then due. If a lender accelerates the loan amount, the borrower must pay the entire balance before redeeming the vehicle.
- Office of Consumer Affairs & Business Regulation (OCABR)'s Consumer Guide to Private Party Car Sales
- MassLegalHelp Buying a Used Car
- Federal Trade Commission (FTC) Understanding Vehicle Financing
- Verify Motor Vehicle Finance Licenses Using the Nationwide Multistate Licensing System (NMLS)
- Download a List of DOB Approved Licensees
- Free Annual Credit Report
- Seven Things to Know About Car Loan Credit Reports
- Auto Loan Calculator Provided by Bankrate
Relevant statutes and regulations for motor vehicle financing
- Massachusetts General Laws Chapter 255B: Retail Instalment Sales of Motor Vehicles
- Massachusetts General Laws Chapter 90 § 7N 1/4: Express Warranty by Dealer of Used Motor Vehicle; Issuance; Consumer's Rights & Remedies
- Massachusetts General Laws Chapter 90 § 7N: Voiding Contracts of Sale (Lemon Law)