Things to Be Aware of When Obtaining a Motor Vehicle Loan

[FIS-PUB 5700]

Michigan Department of Insurance and Financial Services | 877-999-6442 | www.Michigan.gov/DIFS

[03/23]

Consumer Counselor

Financial Information for Michigan Consumers

Things to Be Aware of When Obtaining a Motor Vehicle Loan

Shopping for the right vehicle loan? The

Department of Insurance and Financial

Services (DIFS) is happy to provide helpful

information when searching for that perfect new

vehicle and/or loan.

When obtaining a vehicle loan you will sign a

contract generally called a Retail Installment

Contract. The contract must include Truth-in-

Lending disclosures showing your payment

schedule, finance charges, and annual

percentage rate. You should never sign a

contract that is incomplete or contains blanks.

In addition, you are entitled to receive an exact

copy of the contract, signed by both the buyer

and the seller. If the dealer sells or assigns your

contract to another party, the new party is

required to give you written notice of where and

when to make your payments. The contract

also must state the allowable late fees, in the

event of a late payment. By law, the late charge

cannot exceed $15.00 or 5% of the late

payment, whichever is greater.

Fees

Documentary Preparation Fee

The Motor Vehicle Sales Finance Act (ACT)

allows an Installment Seller (dealer) to charge a

documentary preparation fee (commonly

referred to as the “Doc Prep Fee”) for

completing the paperwork that is required when

you purchase a new or used vehicle that will be

secured by a finance agreement (auto loan).

The Doc Prep Fee charged by a dealer should

not exceed 5% of the cash price of the vehicle

or the maximum amount permitted by DIFS,

whichever is less.

The ACT allows for the maximum amount of the

fee to be adjusted every 2 years. The Director

of DIFS is responsible for reviewing this fee and

will issue a new bulletin when the fee is

adjusted. On January 13, 2023, the Director

approved the current Doc Prep Fee of 5% of

the cash price of the motor vehicle or $260.00,

whichever is less.

Other Fees

When you purchase a motor vehicle you may

also be charged fees payable to the State of

Michigan, a public official and/or notarization for

filing or recording a lien on the certificate of title,

and for satisfying and releasing the lien or

encumbrance. These fees may include a

license fee, title fee, registration transfer fee,

sales tax, temporary registration fee, etc. For

these fees the dealer is only allowed to charge

you the actual fee incurred. Application fees

and GPS location device fees are not permitted

charges.

Finance Charges

Typically, the finance charges on car loans are

calculated by using the simple interest method.

Simple interest payments are determined by

multiplying the daily interest rate by the number

of days between payments. Therefore, when

you make a payment on a simple interest loan it

is first applied to all of the accrued interest and

the remainder is applied toward the principal.

Each month’s interest is paid in full so it never

accrues. If a simple interest loan is paid off

early, there should not be any interest refund

due to you from the finance company, as

interest is not paid in advance. Michigan law

limits the allowable finance charge to 25

percent for vehicle loans.

[FIS-PUB 5700]

Michigan Department of Insurance and Financial Services | 877-999-6442 | www.Michigan.gov/DIFS

[03/23]

Insurance

When you finance a car, the lender typically has

requirements about insurance coverage for the

vehicle in order to protect their interest in the

property. For instance, the lender can require

full insurance coverage on the vehicle over the

course of the loan.

Credit Life and Credit Disability Insurance are

optional insurance products that you can

purchase when buying a new vehicle. A Credit

Life policy would pay off all or some of your

loan in the event of your death and a Credit

Disability policy would make payments on the

loan if you were to become ill or injured and

cannot work. These optional insurance policies

can be expensive and, if financed as part of the

loan, they will increase your loan amount. If you

pay the loan off early or you decide you want to

cancel a Credit Life or Credit Disability policy,

you may be able to receive a pro-rated refund

for these policies. You should contact the

dealer and/or the sales finance company to

request the cancellation and inquire on any

refunds you may be due.

GAP Waiver

A Guaranteed Auto Protection (GAP) waiver is

between the dealer/lender and the customer,

which allows the lender to forgive all or part of

the remaining debt in the event of a covered

loss. With a GAP waiver, the lender agrees to

extinguish the borrower’s financial contractual

obligation under terms of the loan.

GAP Insurance

A GAP insurance policy is between the

customer and an insurance company. GAP

insurance generally covers the difference

between what is owed on the vehicle and the

actual cash value. Dealers often offer this

insurance to their customers at the time of the

purchase; however, you can also contact your

insurance agent to see if a GAP policy can be

added to your auto policy. If GAP is purchased

through the auto dealer it is usually paid up

front. For that reason, you may be eligible for a

refund if you sell, refinance, or pay your loan off

early. Refunds are issued by the dealer so you

will need to contact the dealer to inquire about

the refund.

Spot Delivery

The practice of “spot delivery” occurs when the

buyer and dealer sign the installment sales

contract and the buyer takes delivery of the

vehicle “on the spot,” prior to the seller

obtaining financing from a lender. The dealer

then may require the buyer to return the vehicle

or sign a new contract if they are unable to

obtain financing.

It is the position of DIFS that once a motor

vehicle loan is closed and the buyer takes

possession of the vehicle, the dealer cannot

rescind the contract or request the return of the

vehicle for any reason. Dealers are required to

ensure all conditions related to the closing of an

automobile purchase be met prior to the

borrower’s execution of the contract. If the

dealer is unable to secure financing, the dealer

must accept payments from the borrower until

they can secure financing on the borrower’s

behalf. New loan documents should not need to

be resigned nor should any terms of the

contract change from the original terms.

In the event that a dealer requires you to return

a vehicle, or sign a new contract, please feel

free to call DIFS at 877-999-6442 for

assistance.

About DIFS

The mission of the Michigan Department of

Insurance and Financial Services is to ensure

access to safe and secure insurance and

financial services fundamental for the

opportunity, security and success of Michigan

residents, while fostering economic growth and

sustainability in both industries. In addition, the

Department provides consumer protection,

outreach, and financial literacy and education

services to Michigan citizens. For more

information please contact DIFS at 877-999-

6442 or visit