Car Loan Legal Terms

Auto Finance and Credit Definitions (Car Loan and Legal Terms)

ACQUISITION EXPENSE

The primary costs to a Lender in establishing a car loan for a customer, including the credit investigation and loan documentation process.

 

ADD-ON-RATE

The Add-On Interest rate assumes full use of the amount of money financed for the full term of the contract as though one payment were to be made at the maturity of the contract. It does not take into consideration a declining balance during the term of the contract as is the case with the ANNUAL PERCENTAGE RATE.

 

ASSIGNMENT

A written document transferring from one party to another party ownership of a contract or of a right, title or interest in a vehicle.

 

C.B.I. (The Credit Bureau, Inc.)

One of the major credit reporting agencies that makes available to lending sources customer’s credit history.

 

CHATTEL MORTGAGE

An instrument that would be used to pledge personal property to a lender as security for a debt.

 

COLLATERAL

The property that is pledged as security for an obligation (e.g. a vehicle financed for a customer under a retail sales contract) gives the lender the right to retake and sell the collateral for the purpose of liquidating the debt in case of nonperformance by the customer.

 

COMPENSATING BALANCE

A minimum amount which a borrower must maintain in a financial institution to be eligible to borrow money from that institution (mostly in evidence at Credit Unions).

 

CREDIT

Credit is a word derived from the Latin word, credare, which means to believe or trust. A mutual trust between the creditor (customer) and the debtor (lender) is therefore implied in credit.

 

CREDIT BUREAU INVESTIGATION

To inquire from one of the major credit reporting agencies as to the customer’s credit history. When reporting the credit history, the lender will use the following descriptive terms.

 

CREDIT STATEMENT

A form used to supply the finance sources with the customer’s personal and credit history, and details of the proposed transaction and insurance information.

 

DEALER AGREEMENT

Contract signed by a car dealer with a finance source, evidencing the terms and conditions under which the finance source will extend credit to the dealer’s finance customers.

 

DEALER ENDORSED

An installment sales contract guaranteed in full or in part by the automobile dealer.

 

DEALER PAPER

Refers to the retail sales contracts “sold” by the dealer to Finance sources.

 

DEBT-TO-INCOME RATIO

The percent of gross income that goes toward a customer’s regularly monthly obligations (debts). An acceptable ratio to most lenders is 36% to 40% debt-to-income.

 

DEFAULT

Failure to meet stipulated terms of a contract; e.g., a borrower is “in default” when all or part of an installment is due and has not been paid.

 

DEFICIENCY

The amount still owed by a borrower after a repossession has been sold and the proceeds applied to the account.

 

DELINQUENCY RATE

Number of vehicles repossessed by the lender as a percentage of the number of loans made.

 

DELINQUENT ACCOUNT

A borrower (account) with one or more installment payments past due. A borrower is usually considered delinquent when 15 to 30 days have elapsed (depending on the Lienholder’s policy).

 

FULL GUARANTY

A type of Dealer endorsement whereby the Finance source does not want to handle a particular credit risk, but as a favor to the dealer, will handle the deal with a full guarantee by the Dealer. See FULL RECOURSE.

 

FULL RECOURSE

Dealer endorsement on a retail sales contract in which the Dealer unconditionally guarantees payment in the event of default by the borrower of the full unpaid balance owing on a retail sales contract.

 

HOME EQUITY LINE

The use of equity in a home as a means of financing a vehicle purchase. This type of loan offers attractive rates and provides fully deductible interest, but it does reduce the borrower’s net worth in his/her home.

 

INTEREST ONLY

The Lender holding a retail sales contract may allow a borrower to make an “interest only” payment in the event of a financial problem or emergency.

 

INSTALLMENT SALES CONTRACT

Also called a RETAIL SALES CONTRACT or a TIME PURCHASE. All refer to a credit obligation paid over a specified period of time through regularly monthly payments.

 

LATE CHARGES

Charges added to past due installments on retail sales contracts to compensate for “lost” interest earnings and added costs of special handling for collection.

 

LENDER

Financial institution (Bank, GMAC, Ford Credit, etc.) which finances the automobiles purchased by customers from a Dealer.

 

LIEN

A contract or mortgage which holds the financed collateral as security against default of payment for such collateral.

 

LIENHOLDER

The financial institution holding a contract as collateral for funds advanced to a retail automobile buyer.

 

LIMITED REPURCHASE ASSIGNMENT (LRA)

A form of assignment of a retail sales contract in which a Dealer, on a non-recourse plan with the Lender, agrees to repurchase a vehicle if repossession occurs before a specified number of installments have been paid by the borrower.

 

LOAN LOSS RESERVE

A reserve account established by a finance source that is based on their loss experience to compensate for expected losses from loans extended.

 

LOW EQUITY

A type of contract deviation in which the borrower’s true equity is less than 30% of the cash selling price.

 

MATURITY DATE

The date on which the final monthly payment installment becomes due.

 

MAXIMUM CHARGE

The Lender’s fixed percentage rate which is the maximum interest rate that may be assessed to a borrower in connection with the financing of a retail sales contract.

 

NET PAY-OFF

The amount of money required to “payoff” the interest of the Lienholder holding a retail sales contract on a vehicle that the dealership is taking in as a trade-in.

 

ONE PAY

A contract where the entire balance is due in one payment (usually 7 days). This type of contract gives a customer a chance to take delivery of his/her vehicle immediately and still be able to arrange for credit outside of the dealership.

 

OTHER ARRANGEMENTS (O.A.)

This is a partial endorsement where the Dealer agrees to guarantee a specified amount of money on what is essentially a WOR (See WITHOUT RECOURSE) contract. In the event of default and repossession, the Dealer agrees to pay either the O.A. guaranteed amount or repurchase the vehicle.

 

OVER EXTENDED

Occurs when a customer applies for credit on a vehicle purchase that potential lenders feel would result in it being difficult for the customer to pay this and other obligations. (See DEBT-TO-INCOME RATIO).

 

PAST DUE

An indebtedness that has not been paid on the due date.

 

PREPAID ACCOUNT

A borrower’s account paid in full in advance of the final maturity date.

 

PREPAYMENT CHARGE

The amount deducted from any rebate due a customer when he/she prepays an account. This charge compensates the Lienholder for cost incurred in processing the prepayment.

 

REBATE

Portion of the finance charge refunded to a customer because of prepayment of a retail sales contract.

 

REPOSSESSION

A vehicle reclaimed from a borrower’s possession by the finance source or dealer because of default of payment of the contract, or some other default, under the terms of the retail sales contract.

 

REPOSSESSION RATE

A percentage kept by the Finance source for a particular dealership that measures the number of vehicles repossessed annually to the number of accounts outstanding during that period of time.

 

RIGHT OF OFFSET

This give a lender (Bank, Savings and loan, etc.) the right to confiscate any or all deposits from a direct borrower’s checking or savings account to correct any payment deficiency or default.

 

STRAW PURCHASE

Occurs when a borrower finances a vehicle as a favor to a third party, who usually has a bad credit rating. Lenders abhor this practice, and would call the loan immediately if aware of this arrangement.

 

TRUE EQUITY

Found by taking the wholesale value of a trade-in less any pay-off on the trade-in, and then adding any cash down payment.

 

WITHOUT RECOURSE (WOR)

The form of dealer endorsement on a retail sales contract where liability or loss falls upon the finance source (“lender”). In this instance, the dealer has no obligation, regardless of how the installments may be handled by the borrower throughout the life of the contract.