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Auto Loan Agreement

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Updated on September 9th, 2022

An auto loan agreement is a contract used to secure a loan by a buyer of a motor vehicle. The agreement establishes the names of the borrower and lender, the amount ($) that was borrowed, the length of the loan, how much the borrower needs to pay on a monthly basis, and other important terms. Both parties are legally bound by the contract, and the borrower’s vehicle may be repossessed if they default on their payments.

Contents

Sample

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AUTO LOAN AGREEMENT

1. VEHICLE DETAILS.

Make: [VEHICLE MAKE]
Color: [VEHICLE COLOR]
VIN: [VEHICLE IDENTIFICATION NUMBER]

Hereinafter the “Vehicle”.

2. THE PARTIES. For the Vehicle received by [BORROWER NAME] with a mailing address of [BORROWER ADDRESS] (the “Borrower”), agrees to pay [LENDER NAME] with a mailing address of [LENDER ADDRESS] (the “Lender”).

3. PAYMENT. This agreement (the “Note”) shall be due and payable, including the principal and any accrued interest, on a monthly basis. The total amount borrowed is $[AMOUNT BORROWED] (the “Balance”). The Borrower shall make monthly payments of $[MONTHLY PAYMENT] beginning on [MM/DD/YYYY] and to be paid on the [#] of every month until the Balance is paid, ending on [MM/DD/YYYY]. All payments made by the Borrower are to be applied first to any accrued interest and secondly to the principal Balance.

4. INTEREST. The Note shall (check one):

☐ – Bear interest at a rate of [%] compounded annually.
☐ – Not bear interest.

5. LATE FEES. The Borrower agrees to pay $[LATE FEE] should they fail to pay the monthly Balance with interest within [#] days from the due date.

6. PREPAYMENT. The Borrower has the right to pay back the loan in full or make additional payments at any time without penalty.

7. COLLATERAL. The Borrower agrees to pledge the Vehicle, as described in Section 1, to ensure loan repayment. The Vehicle will only be transferred to the ownership of the Lender upon the Borrower’s default.

8. EVENTS OF ACCELERATION. The occurrence of any of the following shall constitute an “Event of Acceleration” by the Lender under this Note:

a) The Borrower fails to pay any part of the principal or interest as and when due under this Note; or
b) The Borrower becomes insolvent or does not pay their debts as they become due.

9. ACCELERATION. Upon the occurrence of an Event of Acceleration under this Note, and in addition to any other rights and remedies that the Lender may have, the Lender shall have the right, at its sole and exclusive option, to declare this Note immediately due and payable.

10. SUBORDINATION. The Borrower’s obligations under this Note are subordinated to all indebtedness, if any, of the Borrower, to any unrelated third party lender to the extent such indebtedness is outstanding on the date of this Note, and such subordination is required under the loan documents providing for such indebtedness.

11. WAIVERS BY BORROWER. The Borrower and the Borrower’s successors, heirs, and assigns hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest, and all other sums due under this Note, notwithstanding change by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change and agree that the same may be made without notice or consent of any of them.

12. EXPENSES. In the event any payment under this Note is not paid when due, the Borrower agrees to pay, in addition to the principal and interest hereunder, reasonable attorneys’ fees not exceeding a sum equal to the maximum usury rate as permitted under state law, of the then outstanding balance owing on the Note, plus all other reasonable expenses incurred by Lender in exercising any of its rights and remedies upon default.

13. GOVERNING LAW. This Note shall be governed by, and construed in accordance with, the laws of the State of [STATE NAME].

14. SUCCESSORS. All of the foregoing is the promise of Borrower and shall bind Borrower and Borrower’s successors, heirs, and assigns.

IN WITNESS WHEREOF, Borrower has executed this Note as of the day and year first above written.

Borrower Signature: ______________________ Date: [MM/DD/YYYY]
Printed Name: [BORROWER PRINTED NAME]

Lender Signature: ______________________ Date: [MM/DD/YYYY]
Printed Name: [LENDER PRINTED NAME]

Tips for Getting an Auto Loan

Before signing on the dotted line, prospective buyers can improve the rates and terms they get for an auto loan by taking the following tips into consideration:

Tip #1: Get Pre-Approved

Consumers generally have two (2) options when it comes to obtaining a car loan.

    1. Getting preapproved for a loan before vehicle shopping, or
    2. Obtaining a loan after a vehicle has been selected.

It is widely recommended that shoppers obtain a vehicle loan ahead of time, for the following reasons:

Reason 1 – Makes negotiating easier

When a buyer walks into a dealership preapproved for a loan, it reduces the dealer’s ability to control (or attempt to control) the situation. It helps in keeping the focus of negotiation on the price of the vehicle instead of the terms of the loan. Instead of offering lower payments (by manipulating the loan’s length and interest rate), the dealer has to address the selling price of the vehicle.

Reason 2 – Can help the buyer identify issues early-on

By following through with the loan preapproval process, the buyer can ensure they have the ability to obtain a loan. It is highly recommended potential buyers check their credit score ahead of time. There are many free options that don’t run a “hard” check (i.e., they won’t affect your credit score). The lower your score, the worse the terms you’ll be offered. For exceptionally low scores, borrowers may find it difficult to obtain a loan in the first place. If possible, it’s recommended the borrower delay purchasing a vehicle until they can improve their credit score to at least 600.

Reason 3 – Helps in getting a lower interest rate

Once you have your rate, you can use it to your advantage to see if the dealer can beat the rate you were preapproved for. Whatever you do, DO NOT share the rate you received with the dealer – if they know your rate, they won’t be inclined to give you the best terms possible (they’d only be interested in offering a slightly lower rate than yours). If the dealer beats your rate, then you can take their offer. If not, you can finance the vehicle with the loan you were preapproved for.

Tip #2: Make a large downpayment

A common issue borrowers run into after purchasing a vehicle with a loan is the car depreciating faster than the amount owed on the car. This is called being “underwater” on the loan. In other words, should the borrower want to sell their vehicle down the line, the money they get from selling won’t cover the full cost of the loan, causing them to have to make payments until the loan is paid off. If the buyer needs to obtain financing to get another car, they’ll be making monthly payments on two (2) different loans.

To avoid this scenario, the borrower should make as big of a downpayment as possible. Twenty percent (20%) is recommended, although the buyer will still benefit by paying 10% or more as a downpayment on the vehicle.

Tip #3: Get the shortest term possible

The shorter the loan, the better the terms. While the borrower will be required to make higher monthly payments, the interest rate will be lower and the total interest that will be paid over the term of the loan will be far less (as there will be a smaller number of payments). If you can afford it, a term of forty-two (42) months (3.5 years) is agreeable. Many experts agree that sixty (60) months is the maximum term that should be accepted for an auto loan. While unfavorable, if a person can’t handle payments with a shorter term, they should be looking at purchasing a cheaper vehicle.

How to Write

Step 1 – Vehicle Details

The following details will need to be entered to identify the vehicle that the borrower is purchasing:

  • Make
  • Model
  • Year
  • Color
  • Style/body type
  • Drive (e.g., 4WD, AWD, or 2WD)
  • VIN (17 characters)
  • Odometer (the number of miles or kilometers on the car)

Step 2 – Loan Amount

On the fillable field beside “Loan Amount,” enter the dollar amount of the loan numerically (e.g., “$51,500”), followed by the amount in words (e.g., “Fifty-one thousand, five-hundred dollars”). Then, enter the date (mm/dd/yyyy) that the agreement is being completed (most likely the current date).

Step 3 – The Parties

In this section, the person completing the form will need to provide the following details about the borrower and lender:

  1. The name of the person or entity receiving the loan (the “borrower”).
  2. The borrower’s mailing address.
  3. The name of the person or entity lending the money (the “lender”).
  4. The lender’s mailing address.

Step 4 – Payment

In the first field of section 2, enter the monthly payment amount ($) the borrower will be making to the lender until the loan is paid off. Then, enter the date (mm/dd/yyyy) of the first payment, followed by the day of the month all payments will be due, and finally, the date (mm/dd/yyyy) that the last payment will be due.

Step 5 – Interest

Check one (1) of the two (2) options shown under the “Interest” section. If the loan will bear interest, check the first box and enter the amount of interest written out (e.g., “Five and one-fifth”) followed by the interest as a percentage (e.g., “5.2%”). If the loan won’t bear interest, check the lower box.

Step 6 – Late Fees

If the borrower will be required to pay a late fee if they’re late on a payment, enter the amount ($) of the fee in the first field. Next, enter the number (#) of days they need to be late on payment before the late fee will be issued (e.g., “3 days”).

Step 7 – Collateral

Enter the make and model of the vehicle the borrower purchased with the loaned money. Should the borrower default on the loan, the ownership of the vehicle will transfer to the lender.

Step 8 – Governing Law

Enter the name of the state where this loan agreement is being executed.

Step 9 – Signing

Both the borrower and the lender will need to sign, date, and print their names onto the form. Once all signatures have been recorded, the agreement is valid and legally binding. A copy of the contract should be kept by all parties.