An Auto Loan Agreement is a contract used to secure the buyer of a motor vehicle to their legally-binding promise to pay back the full amount they borrowed in order to purchase a 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.
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:
Consumers generally have two (2) options when it comes to obtaining a car loan:
- Getting preapproved for a loan before vehicle shopping, or
- 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 give their credit score a check. There are many free options that don’t run a “hard” check (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 the borrower can, it’s recommended they 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.
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 sizeable 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.
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 life 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, or three and a half (3.5) years. 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.
Step 1 – Vehicle Details
The following details will need to be entered regarding the vehicle that the loaned money will be paid towards:
- Style/body type;
- Drive (ex: 4WD, AWD, or 2WD);
- VIN (17 characters); and
- Odometer (the number of miles or kilometers on the car)
Step 2 – Loan Amount
After the words “Loan Amount:”, enter the dollar amount of the loan numerically (ex: “$51,500”), followed by the loan amount in words (ex: “Fifty one thousand, five-hundred dollars”). Then, enter the date (mm/dd/yyyy) that the agreement is being completed. This is often the “current date”.
Step 3 – The Parties
In this section, the person completing the form will need to enter:
- The name of the person or entity receiving the loan (the “borrower”);
- The borrower’s mailing address;
- The name of the person or entity lending the money; and
- The lender’s mailing address.
Step 4 – Payment
In the first field, enter the monthly payment ($) 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. If the loan will bear interest, check the first box and write the amount of interest in words (ex: “Five point two percent”) followed by the interest as a percentage (ex: “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 payments, enter the amount ($) in the first field. Then, enter the number (#) of days they need to be late on payment before the late fee will be issued (ex: “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 the loan is being made in.
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 will be considered official. A copy of the contract should be made for all parties.