What is a rent-to-own car contract?
A rent-to-own car contract is a legally binding contract in which either an individual who is self-employed, disabled, retired, and/or has poor credit, or a parent or guardian of such a person, agrees to lease a vehicle for a set period of time with the intention to purchase it outright at the end of the term. The flexibility and low-interest rates of rent-to-own car contracts make them appealing alternatives to traditional purchasing and leasing options . Generally, the Down Payments are substantially lower than the Down Payments required by lending institutions, and the monthly payments are low. On top of that, most contracts do not have residual fees at the end of the contract period, and they allow you to subtract any outstanding balance on the vehicle from the balance owed and to finance that amount at a low interest rate over a longer period of time once the vehicle is paid off.
The essential elements of a rent-to-own car contract
As with any contractual agreement, the terms of rent-to-own car contracts can vary widely. It’s important to be fully aware of what you’re getting into before signing on the dotted line. To that end, most rent-to-own contracts will feature the following essential elements:
Payment terms
Like a typical payment plan, a rent-to own car contract will lay out the terms for paying off the total cost of the vehicle. This will include the amount of your monthly installments, as well as how much your vehicle is worth and how much time you have to pay off the total value. Typically, rent-to-own contracts will extend over a period of 36 months, or three years.
Vehicle information
Here, the contract will include important information about the vehicle, including its year, make, model and VIN. The value of the vehicle is also typically included, and this amount will usually be broken down into total price, down payment, taxes and interest paid and the remaining balance.
Buyer obligations
Like other contracts, rent-to-own car contracts include specific language related to the expectations of both parties. For example, most rent-to-own contracts will require the buyer to provide proof of income and take out insurance on the vehicle. Failure to uphold these requirements may mean having the vehicle repossessed.
Delinquency terms
Like other types of payment agreements, rent-to-own contracts will typically include an additional interest rate for any payments made beyond the terms of the contract. The rate may be slightly higher than standard credit rates. In some cases, the amount of the collateral can be increased, although this is relatively rare.
Because of the less formal nature of rent-to-own car contracts, it’s crucial for buyers to pay extremely close attention to all aspects of the agreement if they want to avoid costly fees, repossession of their vehicles and other related issues. As such, cars and no credit is a bad choice for a person hoping to obtain a vehicle.
The advantages of using a rent-to-own car contract
When entering into an agreement, you can find yourself in a win-win situation if both parties can take advantage of the perks presented. For instance, when a buyer and seller agree on the terms of a rent-to-own contact, the contract can be of significant value to both parties if both are willing and able to deliver on the requirements of the agreement.
This type of agreement benefits the seller in that they will receive payments from the buyer until the purchase price is satisfied. They will most likely be paid a little more than what the car is worth; thus, they will benefit through a higher sale price without having to do any negotiating or extra advertising to sell the car. The buyer stands to benefit whether they have poor credit, no credit or if they just want to secure a car without the hassle of conventional financing. Additionally, this type of agreement can be beneficial because the potential for ownership remains, whereas the conventional lease does not have that same outcome: ownership.
Rent-to-own agreements also give the buyer the ability to get a quality car at an affordable price, which enables them to easily budget for the monthly payment. A finance company is often not interested in working with a buyer who has no or poor credit and may charge a high amount or completely reject someone who has filed personal bankruptcy. However, with a rent-to-own contract, the applicant does not have to fear rejection, as long as they are able to complete the terms of the contract. It also offers peace of mind for the seller because they do not have to worry about someone skipping out on a car loan, because the buyer is required to turn over the car when they are done with it.
A rent-to-own car contract is a flexible agreement that can fulfill the needs of both the buyer and seller. It presents a financial option for someone who might be unable to qualify for traditional financing because they have poor credit, have just filed bankruptcy or have another issue that makes them an undesirable candidate to finance a vehicle. The rent-to-own contract can allow the buyer the flexibility to make a larger down payment and/or charge less in monthly installments over a shorter timeframe.
The risks and disadvantages
When assessing the potential of rent-to-own vehicle contracts, it is important to recognize that they are not perfect for every situation. There are important risks, such as the possibility of spending more than you would have on one of our lease deals depending on the car you choose, that must be considered.
One of the biggest dangers of using a rent-to-own vehicle contract from one of their dealers is that you may face a massive financial penalty if you are unable to satisfy the total cost of the car over time. For example, if you think you will be able to pay off a car in two years, but then experience financial difficulties and cannot afford your payments, you could end up paying for the car for four or five years. In this case, you would be paying far more than the car is worth, and the savings you anticipated from rent-to-own as opposed to leasing may not be worthwhile.
For example, look at the following breakdown: A 2011 Ford Escape with 50,000 miles retails for an average of $17,500 in Ontario (of course mileage varies by region). When renting this vehicle at a rate of $280 per month for three years (36 payments), you will have spent $10,080. But if you cannot afford those payments and cannot buy out the vehicle after the three year period, you will likely end up paying the dealer far more.
So let’s say you paid the car off in year 4, just $1,329 higher than the cost of leasing the vehicle. Sounds good right? Maybe, but remember that on the fifth year you have to make those payments again, and again, and again. In this case, you have lost all the benefits and savings of the rent to own. This can be catastrophic.
Loyola Canada Holdings Inc. v. Ignace J. Paul, 2015 ONCA 204 is a recent decision on the enforceability of rent-to-own contracts. In this case, a woman named Ignace J. Paul began making payments on a used, 2006 Ford Windstar Wagon for her son using a rent-to-own vehicle contract. After she had made several payments, Paul missed a payment. A number of days later, the vehicle was repossessed. The issue in the case was whether or not the agreement was a contract of sale or lease, since each would have different implications when the vehicle was repossessed. After determining that it was a contract of sale, the Court found that Loyola Canada Holdings acted within their rights in repossessing the car.
One major issue with rent-to-own vehicle contracts is that they can be difficult to enforce in court. Laws governing the repossession of vehicles differ depending on the area, and many courts have viewed rent-to-own vehicle contracts as loans rather than buying or leasing agreements. Because of this, shops offering rent-to-own vehicles can revoke the contract whenever they see fit, and retain all of the payments that have already been made.
However, this does not mean that these agreements cannot be enforced; you simply need to know your rights under the law, and the expectations outlined in the agreement and by the shop under the provincial regulation they are governed by.
How to create a rent-to-own car contract
When creating a rent-to-own car contract, first you need to identify a few things. Who is the dealer and who is the customer? You would include their names and contact information in the introductory paragraph. Next, how much is the down payment going to be, if any? What about their monthly payments? Make that clear and state exactly how many months they are scheduled to make payments for.
If they miss any of those payments, what is the penalty? For example, if they miss more than three monthly payments, they may have to pay a penalty of $xxx. Perhaps you will give them the chance to catch up on late payments before repossessing the car and offering it up for rental again. You will also want them to ensure the car is returned to you in the same condition that they received it in , except for normal wear and tear.
You should also describe the type of insurance coverage that is necessary—one that pays for damage to the vehicle. You may ask to be paid for that insurance upfront before the customer can take the car home. For example, you may charge $100 for six months of coverage upfront.
Be sure to read the Texas Property Code § 93.001, as it includes language for rent-to-own contracts that you may want to incorporate. As always, when drafting legal documents of any kind, you should consult with an attorney.
How to customize a rent-to-own car contract template
A rent-to-own car contract template usually provides a basic format or a general lay-out for such agreements. This includes essential components like the names and contact details of the parties, property description, payment terms, security deposit, and termination terms. However, since rent-to-own agreements are a product of negotiation, it is essential that you do not assume that the generic provisions will be apt for your transaction.
For instance, some templates will have similar provisions for rent, late charges, and repairs. A specific state may not allow late charges or require that the late charges not exceed a certain percentage of the rent. The terms about repairs also need to be in conformance with the state laws. The lease part of the template may not be needed if the transaction is for just a vehicle, etc.
Not only should a rent-to-own contract be checked for compliance with state and local laws, but it should also be customized for the needs and requirements of both buyer and seller. Depending on the circumstances, a party may find a template deficient. For example, some templates may not contain financing or security provisions. The parties should sit down and discuss their needs and edit or reword aspects of the template that do not meet their requirements. If there is a deficiency in the contract template, it would be prudent to have a lawyer draft the provisions or the entire rent-to-own contract.
Any customization must benefit both parties. For example, if the buyer does not have a good credit rating, the seller would want a high interest rate. But then, the interest rate must be limited by the state law. The interest charged must be reasonable in terms of the prevailing market rates. Having an outside party like an attorney go through the customized provisions can lend credibility to the transaction.
Although one party may feel comfortable making changes to a rent-to-own contract template, it is best that both parties consult a professional like a lawyer and make the alterations together. This way, both parties will have a clear understanding of the terms and obligations of the other party.
Legal considerations and compliance issues
Considerations and Compliance Regarding Rent-To-Own Car Contracts
Legal requirements vary by state, and it is important to understand the applicable laws in your state regardless of the type of financing you obtain.
Some states do not allow contracts on vehicles to be enforceable until a vehicle has been delivered to the purchaser. If a contract is not yet enforceable, the purchaser/borrower may have a right to any money paid, even if the terms were negotiated in advance.
Since the seller may not have an expectation of receiving the remaining funds if the buyer does not complete the transaction, it is important for the seller to thoroughly review the buyer/customer’s payment history and work with the buyer to schedule any payments that are past due.
Because state laws vary depending on the state, it is important to understand the specific laws in your state, especially regarding issues of enforceability. If you have questions regarding enforceability and how it may affect the buyer/seller relationship, we recommend speaking with a qualified attorney.
Rent-to-own car contract template resources
When searching for rent-to-own car contract templates, there are some key places to look. It is important to note that the site you visit may not specifically state they have what you are looking for. So, take a moment to browse the site before moving to another source.
Lawdepot.com
LawDepot.com sells a number of premade legal forms that are user-friendly and inexpensive. Contracts can be downloaded on the same day you purchase them.
USLegalForms.com
USLegalForms.com has a huge range of legal forms in multiple categories. You do not have to register to view the forms and contracts that you are interested in but registration is needed if you want to purchase and download.
Nolo.com
Nolo.com has a simple search tool that allows you to find exactly what you are looking for. Simply choose the type of legal form , and it will generate a list of related contracts. It also shows the price for the download.
Contractsspecialist.com
Contractsspecialist has many industry-related contracts, and rent-to-own contracts are included. Prices vary with each contract, but they are able to quickly provide an estimate if you contact them directly.
Speaking with an Attorney
If you draft your own contract from a template, it is still recommended that you speak with your attorney. It is common for the person drafting the contract to leave out important details that could be crucial for the agreement.