How to read the fine print: Understanding a vehicle finance agreement

Published On
November 21, 2023
Category
Written by: Graham Michaels – Automotive, Technical, and Business Writer

A majority of vehicle buyers borrow money to purchase their new ride, either through a loan from their bank or by using financing arranged by the dealer. Dealers may have access to multiple providers and better rates, so this can be a great option. But when making such a major, multi-year financial commitment, it’s important to understand exactly what you’re signing, before you sign it – especially as there’s no cooling-off period for vehicle purchases in Ontario.

Finance agreements are not usually signed until you take delivery of the vehicle. Before that, you’ll have likely signed a bill of sale – a vehicle sales contract. Once signed, this agreement is binding – only if the dealer fails to include one of several mandatory disclosures may you cancel the contract. But if, for example, a dealer promises credit at a particular interest rate and then is unable to deliver, this would be a legitimate reason for you to legally step away from the deal.

“Let’s say the dealer has promised you an 8 per cent interest rate,” says Tim Hines, director of consumer support at OMVIC, Ontario’s motor vehicle sales regulator. “They should put those calculations on the contract so that all the financing details are within the bill of sale. Then the dealer will try and get you what they committed to getting. If they can’t – let’s say they can only get 9.5 per cent – then the consumer has two options. You can accept, or you can take your deposit and walk away. Particularly if the monthly payment is now out of your budget.

“It may not be the dealer’s fault that they’re making the change,” he continues. “Perhaps your credit score meant that they couldn’t obtain the promised rate. But you’re now in the driver’s seat when it comes to agreeing to new terms, or not.”

Hines also advises consumers to be vigilant when the dealer submits your details for credit applications. Make sure your salary is accurate and that any existing debts are not understated to boost the chances of getting the application approved. Whether instigated by the dealer or by yourself, this type of misrepresentation is illegal.

Assuming the application goes well, and the finance agreement comes through, it’s time to review some key terms before you sign. Ontario’s Consumer Protection Act (CPA) dictates what must be included in what’s known as the Initial Disclosure Statement (IDS), which you should receive before signing the agreement.

The definitions of the terms in the IDS are ingrained in legislation. Neither dealers nor credit institutions are permitted to change the names of these terms or reword things to confuse the consumer, whatever format the agreement takes, although additional information may be included. Let’s look at a few of the most important items.

  • The term of the agreement – for example, five years. Longer finance agreements are more popular than ever at this time of high interest rates, but reduced monthly payment amounts may go hand-in-hand with an increased total cost of borrowing and a higher risk of negative equity.
  • That’s why it’s important to review the cost of borrowing, which refers to the amount of money the bank charges you over and above the price of the vehicle, and the total amount payable, which shows how much your new ride will cost after interest and fees have been applied.
  • Full details of the interest rate on the loan must be included, including any changes during the term of the agreement, as well as when the lender will start charging interest (perhaps there’s a buy-now-pay-later grace period).
  • Meanwhile the annual percentage rate (APR) includes the interest rate plus any fees associated with arranging the loan. The APR could be the same as the interest rate if no fees apply.
  • Payment information – how much and how frequently will you be paying back the loan? This might be weekly, bi-weekly or monthly. Hines notes that it’s important to compare like-for-like frequencies when considering different payment offers, or when attractive payment amounts are advertised by dealers.
  • Also included is how each payment will be applied to the outstanding principal amount and interest, and any prepayment rights, charges or penalties that apply – or what the penalties are if you fail to comply with the terms of the agreement.

We’ve covered the most important information above, but head to the OMVIC website for a full list of what should be included in the IDS.

Few of us are experts in contract law, but properly understanding the key terms of a finance agreement should help you get the deal that’s right for you and prevent problems further down the road.

Finally, Hines has some advice for when the loan has been paid back. “When you finance a car, the loan company will often put a lien on the vehicle,” he explains. “When your loan is done, they should remove the lien. If they don’t, you should follow up with them because an outstanding lien will make it harder to sell the vehicle in the future.”

OMVIC has been delegated responsibility for administering and enforcing the Motor Vehicle Dealers Act (MVDA). Visit omvic.ca to learn about your consumer rights when you purchase from a registered dealer and sign up for OMVIC’s monthly newsletter.

Contact OMVIC’s consumer support team at consumers@omvic.on.ca or 1-800-943-6002 if you have a complaint about a registered dealer or salesperson.

OMVIC also offers free education services and webinars for consumers upon request. To learn more about your rights as a consumer, contact education@omvic.on.ca for more information on our services and materials.

Our new OMVIC website launches November 21. It’s been designed to empower car-buyers like you. Whether you’re in the market for a new car, seeking expert advice, or simply exploring your rights as a buyer, our website is your gateway to a wealth of information. With a mobile-responsive design, intuitive navigation, and engaging content, we’re committed to making your experience seamless and informative. Dive into our fresh platform and take control of your consumer journey.

Follow OMVIC on social media to stay up to date on the latest news. IG, Twitter, Facebook.

This story was created by Content Works, Postmedia’s commercial content division, on behalf of OMVIC.