Perhaps one of these two scenarios is familiar to you.
•Your car has reached the point where it is unreliable and costing you more in repairs than the vehicle is worth, so you’re considering purchasing or leasing a new vehicle.
• You are faced with an unexpected expense or wish to consolidate your credit card debts and contemplate obtaining a loan, using your vehicle to secure the loan.
Faced with either of these scenarios you need to consider your financing options.
In the case of having to acquire a vehicle, you consider whether to buy or lease.
Prior to signing an agreement, you may wish to consider the following.
Conditional Sales Contracts
When purchasing a new vehicle, it is common to finance the purchase through the lending arm of the automobile dealership. The lending instrument utilized in these circumstances is known as a conditional sales contract. By definition, a conditional sales contract is a contract for the sale of property where the buyer has possession and use, but the seller retains title and rights of repossession until the terms of the contract are fulfilled.
What happens if you default on a conditional sales contract?
The Consumer Protection Act provides that a credit grantor (lender) under a credit sale may enforce payment of the outstanding balance in only one of two ways. The lender may enforce their security interest and seize the vehicle or they may sue for all or part of the outstanding balance. The so-called "seize or sue" rule.
A conditional sales contract is a form of credit sale, so when default occurs the lender is bound by the provisions of the Consumer Protection Act. If they seize the vehicle, the obligations of the borrower are at an end. Alternatively, if the lender starts an action to sue for the outstanding balance, then upon obtaining a judgment, the lender’s security interest in the vehicle is extinguished and title to the vehicle passes to the borrower.
Leasing a Vehicle
A lease is an agreement wherein the lessee (you) pays the lessor (automobile dealership) a monthly payment for use of the vehicle. When the lease expires, you return the vehicle to the dealership. Ownership rights to the vehicle remain with the dealership.
• What happens if you stop making the lease payments?
If you stop making payments under a lease agreement, the dealership or lessor may seize and sell the vehicle. Thereafter they may commence legal action against you to recover the difference between the payments due for the unexpired term of the lease (including the residual value or fair market value of the vehicle at expiration of the lease) less the actual amount recovered from the sale of the vehicle. You could find yourself without a vehicle but still responsible for the payments.
Personal Loan Secured by Vehicle
A personal loan secured by your vehicle to finance the unexpected expense or consolidate your credit card debts is different lending arrangement than a conditional sales contract. Unlike a conditional sales contract, you maintain ownership of your vehicle; the lender merely has a security interest in the automobile.
• What happens if you default on a personal loan secured by your vehicle?
A personal loan secured by a vehicle is not a credit sale as defined in the Consumer Protection Act. As a result, unlike a conditional sales contract, when default occurs a lender may sell the vehicle, and commence legal action against you to recover the remaining balance.
Regardless of the type of lending arrangement you have, when a default occurs, it is best to understand how you will be affected and what your alternatives are to resolve the issue.
If you are experiencing any of the situations described here, you may wish to consult a lawyer or your local trustee in bankruptcy for advice regarding your obligations and how to deal with them.
» Wayne K. Palmer is a senior manager in BDO’s Brandon office. He is responsible for both the consumer and commercial practices in Brandon and surrounding areas, including Boissevain, Minnedosa, Neepawa and Dauphin. Wayne has more than 25 years experience in the financial recovery services field.