Motor Vehicle Financing for Massachusetts Consumers

A motor vehicle loan is a way for consumers to purchase a new or used vehicle.  Consumers borrow funds from a lender and pay the lender back over time with interest.  Essentially, the lender purchases the vehicle and allows the borrower to use it.  Technically, the lender owns the car and consumers agree to be responsible for it.  The vehicle's title is not transferred to the consumer until the final loan payment is made.  If a consumer does not make vehicle loan payments as agreed, the lender is within their rights to repossess the car.

Motor vehicle financing can be obtained from a number of sources.  All non-bank entities offering motor vehicle financing and operating in Massachusetts must be properly licensed by the Division of Banks.    Consumers will sign a contract at closing stipulating all aspects of the agreement. 

Where can Consumers Obtain Motor Vehicle Financing in Massachusetts 

  • Banks and credit unions, including both state and federally chartered banks and credit unions, will generally offer auto loans.  Consumers are encouraged to consult with their bank 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 for consumers 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 often carry high interest rates and fees.
  • Servicers, are the entity conducting the process of billing the consumer and collecting loan payments.  A servicer is generally not the same party as the loan originator or loan owner.

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What Consumers Should Know About Motor Vehicle Loans/Contracts in Massachusetts

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 consumers will pay based on the 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.  In Massachusetts, the APR is capped at 21%.  This means the interest rate, with any additional finance charges added to it, may not exceed 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.  As long as finance charges are truthfully disclosed on the contract, there are no limitations on finance charges.
  • Late fees, must be explained in the contract.  Pursuant 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 frequently require consumers to maintain full insurance coverage as a condition of credit.

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Additional Terms Consumers Should Know About Motor Vehicle Loans/Contracts in Massachusetts

  • Amount financed, is the dollar amount of the credit provided to the consumer.
  • Annual Percentage Rate (APR), is the total average cost of the loan including all finance charges and the interest rate.  In Massachusetts, the APR is capped at 21%.  This means the interest rate, with any additional finance charges added to it, may not exceed 21% for an automobile.
  • 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 a consumer's credit score and additional information used to make credit decisions.  A credit report will include the consumer's 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.
  • 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.

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Consumer Rights Related to Motor Vehicle Financing 

Massachusetts is a "Right to Cure" state, meaning the borrower is protected from repossession during a certain period of time.  The Division enforces the Right to Cure related to motor vehicle loans in Massachusetts.

  • Right to Cure related to motor vehicle lending mandates a process lenders must follow before exercising their rights in the event of a loan default.  The day a motor vehicle loan contract is in default the Right to Cure process begins; 10 days or later the lender must send a Right to Cure Notice to the borrower.  The Right to Cure Notice provides the consumer a 21 day period to bring the loan current.  If the consumer successfully cures the loan, then servicing continues as normal.  If the consumer fails to bring the loan current within the Right to Cure period, the lender may seize the motor vehicle used as collateral on the loan.  Furthermore, a lender may not activate a GPS interrupt device until the Right to Cure period has expired. 

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Relevant Statutes & Regulations for Motor Vehicle Financing

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Additional Motor Vehicle Loan Resources for Consumers 

 

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