What Is a Vehicle Security Agreement?
A vehicle security agreement is essentially a contract that is signed during an automobile purchase that outlines that the vehicle is being used as collateral for the purchase. This means that if the buyer fails to make payments on the car, the lender who provided the financing will be able to claim the vehicle and resell it in order to recoup its losses. For most people, this type of financing is the most feasible option for purchasing a vehicle, because few people have the hundreds or thousands of dollars it takes to pay for a car. In fact, vehicles are one of the most commonly financed items that people buy, and the vast majority of those purchases are made with a vehicle security agreement attached.
Even for those who have the resources, financing often still makes sense. A vehicle security agreement means that the buyer will quickly and easily obtain the car of his or her choice , and can then pay off the cost of that vehicle over time. Unlike buying a house, when there is typically a significant amount of equity involved, there is usually little to no equity in a vehicle immediately after the purchase. Most new vehicles depreciate quickly, so if the buyer needed to sell the vehicle just a month later, the sale price likely would not be enough to cover the entire loan amount and the rest was simply lost equity. There is also an increased risk of the vehicle being damaged in some way during the first few years, which could result in costly repairs that the buyer cannot afford to make.
Car dealerships have lenders with whom they partner to help you get financing, and this is important to understand. All financial institutions are required to be properly registered and licensed to grant vehicle financing contracts. The licensing process includes a review of items such as accounting procedures, lending policies and client-service policies.
Essential Elements of a Vehicle Security Agreement
A well-crafted vehicle security agreement typically includes several key elements.
Collateral – At the very heart of any security arrangement, the collateral must be clearly identified. California law requires that the following information be included:
1. An identification of the collateral by its type and a description of the security interests created (i.e., a "security interest in the following goods: all of debtor’s vehicles"); and
2. A description of the fixtures to which the security interest attaches, if any.
Terms – The terms of the security interest (including the amount of any debt, how the interest is to be paid, etc.) should be stated clearly.
Obligations of the Debtor – While this provision may be drafted differently depending on the intent of the parties, the debtor should be required to assume certain obligations, such as the payment of inventory costs and taxes for the collateral, obtain excessive coverage of all insurable risks, and participate in all audits and provide all information requested by lender.
Representation and Warranties – The vehicle security agreement is the perfect place to include the borrower’s representations and warranties. By doing so, the borrower will not be able to later claim that he or she was not aware that the lender was relying on such information in granting the loan.
Events of Default – California law stipulates the circumstances under which a lender may proceed with self-help repossession. Thus, the vehicle security agreement may include other events of default in order to afford the lender greater flexibility in taking actions to mitigate damages in the event a default occurs.
Ways in Which Vehicle Security Agreements Function
When a borrower wishes to purchase a vehicle but does not have sufficient funds or wishes to hold onto their cash for other investments, they may consider financing the vehicle through the use of a vehicle securities agreement. A vehicle securities agreement is an agreement between the borrower and lender, whereby the lender becomes a secured creditor with a claim on an asset in which the borrower has equity, such as a vehicle. The borrower guarantees the loan by virtue of the security interest in their vehicle.
The process for establishing a security agreement on a vehicle involves the borrower signing a written security agreement containing a description of the vehicle or other property subject to the lien. Upon signing, the borrower retains possession of the vehicle. The security interest may be perfect by filing an application with the department for motor vehicles, see NRS 482.3663, or by taking possession of the property in certain other circumstances. NRS 104.9302(1)(e). In addition to the security agreement, a Uniform Commercial Code Financing Statement should be filed with the Secretary of State to perfect the security interest. NRS 104.9510. The borrower must then pay the lender the principal, plus interest, and any other amounts owed pursuant to the agreement. If the borrower fails to pay or perform, the lender may either take possession of the property securing the security interest, or may file a lawsuit (in which case Nevada law governs the priority of liens). NRS 104.9501-106.
Legal Aspects of Vehicle Security Agreements
The legal implications of vehicle security agreements can be wide-ranging and significant for both lenders and borrowers. For example, while a lender’s remedy in the event of default by a borrower is generally no more than the repossession of the vehicle, the vehicle registration authority may only cancel or suspend a vehicle registration certificate on the written request of the borrower and then generally only after the lender has taken formal legal action against the borrower by obtaining a judgement in the Magistrates Court for the district in which the property is situated. This requirement can cause considerable frustration for creditors who have secured a loan with the vehicle as it tends to delay vehicle repossession.
In addition, even in the absence of a default, the ownership of a vehicle which is subject to a security agreement may be disputed (e.g. as part of a divorce proceeding, as the result of a family dispute or even where the vehicle is fraudulently obtained). The defences to an action for repossession can be complicated.
The lender may also find itself embroiled in a dispute between the borrower and the dealer from which it purchased the vehicle concerning defects in the vehicle or other alleged misrepresentations by the dealer in selling the vehicle. If that occurs, particularly in an extreme case where the lender is trying to reclaim the vehicle because it has discovered the vehicle is defective, lenders may find themselves at the opposite end of litigation from the defrauded consumer (the borrower).
This is most often seen where a dealer had a right to register a vehicle in its name at the time of purchase. In that situation, notwithstanding the existence of a prior vehicle security agreement, the dealer may continue to register transfers of ownership of the vehicle and so acquire a good title to it. Similarly, where the dealer does not have a right to re-register a vehicle but sells it to a third party without the lender’s consent, the third party may acquire a good title to the vehicle. Both situations are problematic for a lender that registers a vehicle security agreement.
A dealer is not entitled to create a security interest in a vehicle in its own right. However, many dealers are members of dealerships’ associations that allow them to act with the association’s authority. The ceding of the security interest to the association may be seen as adequate authority.
Additional analysis is required if the dealer has sold the vehicle after entering into a security agreement but before registration of the cession of the security interest. The requirement that the cession be registered may be seen as necessary to comply with the Personal Property Security Act, 1987, but not necessarily for the purpose of creating a valid and enforceable security interest. Nevertheless, the wording of the cession may be significant in deciding whether or not the transaction falls foul of the provisions of the Alienation of Land Act, 1981.
If the dealer has transferred the vehicle to the borrower without having registered a vehicle security agreement ceding its rights to the lender, the lender’s security interest will not be defeated. The dealer will be seen as representing the borrower. The dealer failed to recognise the separate identity of the lender for the purpose of the transaction and acted without the consent of the lender. The dealer is entitled to claim damages against the borrower in the form of any loss the dealer has incurred as a result of the dealer’s unlawful conduct.
Where the security interest is ceded with the right of the dealer to re-register the security interest, provided that the underlying security agreement is valid, the question arises whether the dealer will be acting as the agent of the lender when entering into and performing its obligations in terms of the agreement, and what is the status of a cession of a vehicle security agreement where the dealer transferred ownership of the vehicle without the lender’s consent.
Problems Associated with Vehicle Security Agreements
There are many common issues which can arise in the context of a motor vehicle security agreement and consideration of these issues will be helpful to both commercial lenders and their consumers when they’re getting the transaction organized.
Compliance with the Personal Property Security (PPS) Rules
The PPS Rules within the Personal Property Security Registration (PPSR) System differ in their enforcement in each state. If a lender does not fully comply with those rules under each state’s PPSR system, then they could easily fail to create a valid perfected security interest in the vehicle.
Failure to register your security interest in the right location
In order to register your vehicle security interests with the right authority , you need to register it in the state where the owner of the security interest is located. So if the owner of the vehicle is from San Diego and the owner of the lender has an office in San Diego, then the registration is going to need to occur in Los Angeles where the lender’s other offices are based.
Failing to properly describe the collateral
Your collateral description needs to include detail on any and all rights in relation to any goods. For instance, if financing the business’ acquisition of 100 cars, a generic description is not sufficient. You must specifically include each and every car you’ve financed in your collateral description. If you do not name each one individually, then you do not have a perfected security interest in that collateral.
Best Practices for Drafting a Solid Vehicle Security Agreement
When drafting a vehicle security agreement, whether as a standalone document or as an industrial security agreement (electronically merging the security charge agreement with the form of borrower’s demand promissory note), it is important to consider the following:
- Describe the secured obligations clearly and comprehensively. For example, the security agreement should identify the specific loan made under the loan agreement (as well as any future lending under that loan) as well as the other obligations (including environmental cleanup, lease indemnities, etc.) that are secured by the collateral.
- Identify collateral with reasonable particularity. The identification of the collateral may be within the security agreement itself, in the schedules attached to the security agreement or in a schedule that is not within the security agreement but is cross referenced therein. However, regardless of where the collateral identification is found, the collateral description should be adequate to allow a third party to identify the collateral.
- Identify the governing law and specify that the security agreement was made in the specified state. This language will help to establish that the applicable law is that of the specified state.
The Purpose of Vehicle Security Agreements
Vehicle security agreements are pivotal in the spectrum of automobile financing. For prospective buyers, the concept that the vehicle serves as security alleviates a layer of anxiety. The lender (usually a bank or credit union) has a vested interest, and if anything goes awry, the lender will have a legal ownership claim on the collateral. From the lender’s perspective, this reduces risk. In most circumstances, the vehicle is worth more than the seller’s claim against the buyer. In some of the more risk-prone lending circles, like buy-here, pay-here lots, it’s not uncommon to see a vehicle security agreement hooked up to a GPS unit that will disable the vehicle if the borrower gets behind on the payment schedule. In those situations where the vehicle is a necessity for keeping up that payment schedule, vehicle security agreements are vital. They are also essential in the event of a subsequent purchase—when the second buyer purchases a car from the first buyer without the debt being paid off in full. In other words, they are indispensable in a second scenario where the car is the first buyer’s primary means of transportation, because the buyer wouldn’t have enough cash on hand to buy a different car. Given that most automobiles are at least $10,000 and can be well in to the $20,000 range, the vehicle security agreement can be a bit more complicated. Also noteworthy is the fact that states like Florida require a transfer of title to the lending institution and a notation on the title that the car is subject to a loan in order for the debt to be considered secured. In other words, the lender would be listed as the owner of the car until it is paid off, after which the title would be transferred back to the borrower. In contrast, Georgia car loans do not involve a mandatory transfer of title. The borrower remains the title owner of the car, but the bank will be secured on the Certificate of Title once it is issued. A security interest would be noted under the name of the lender. Most transactions with regard to vehicle security agreements are voluntary and consensual. If the borrower otherwise keeps up with the loan payments, if the seller otherwise maintains the lease payments, and if there is no other breach under the terms of the agreement, none of the parties will need to worry about repossession, sale, etc. And, in the event of default, Georgia law requires that a notice of default and intent to accelerate be tendered to the borrower. With express statutory privileges like that, a vehicle security agreement has two sides to it.
FAQs About Vehicle Security Agreements
If the vehicle is sold and the loan paid out, does that mean the security agreement no longer exists?
No. The loan is paid out but the security agreement still exists. The completed discharge of a vehicle security agreement can only be done by payment of an application fee. The owner of a vehicle must pay the application fee before the discharged security agreement is completed .
Do I have to get my security agreement discharged if the loan is paid out?
Yes. The owner is legally responsible for having the discharge submitted to a registry. The lender may submit the application for discharge of the security agreement on the owner’s behalf.
Is it possible to get copies of discharges?
The discharges are made available to the lender of the original loan.