Auto Financing Laws in Texas

Buying a vehicle often requires consumers to borrow money. These major financial loans are complex, and there are a number of issues that can present themselves during the life of an auto loan. To help both the creditor and consumer, states establish various laws on automobile financing. Texas features several such laws. Some pertain to the financing after the purchase. Others deal with financing at the point of purchase. Failure to follow or understand these laws can have serious consequences for creditors and borrowers.

Commercial loans in Texas must follow state law guidelines on interest rates. These laws are part of Chapter 306 of the Texas Finance Code. For auto loans, Texas state law limits lenders to an annual interest rate of no more than 27 percent. For some vehicles, the rate is lower. The determining factors are the age of the vehicle and the amount borrowed.

Texas state law allows consumers three days to cancel some automobile purchases. If they choose to chance a purchase, they must repay the auto loan. Otherwise, the lender will can claim title to the vehicle and make it impossible for the buyer to back out of the deal.

In accordance with Texas state law, an auto lender retains significant rights in cases where the buyer does not fulfill the terms of the financing contract. If the buyer defaults on the auto loan, the creditor has the right and legal authority to enter the consumer’s property and seize the vehicle without prior notice or consent. The creditor is allowed to keep the vehicle as compensation for the unpaid debt, and the creditor can sell or auction the vehicle. If the vehicle is sold, the consumer is still responsible for the difference between the outstanding loan balance and the sale price.

The Texas Motor Vehicle Commission Code, known in the state as the Lemon Law, provides buyers of new automobiles with protection from defective automobiles. The law provides a complaint procedure buyers can use to demand repairs or reimbursement for their purchases. Dealers are given a reasonable amount of time to repair a defective new vehicle. The state law sets the limit at four attempts to fix the defects. If the defects are not addressed, vehicle owners can appeal to the Texas Motor Vehicle Commission, which becomes involved in mediating the dispute between the manufacturer, dealership and buyer. If the commission finds that the vehicle is defective and that repairs are not possible, the commission can require the dealership to issue a refund. This refund releases the finance loan on the vehicle. The state law, though, allows the seller to keep a small amount in exchange for the period during which the buyer used the vehicle. The buyer remains responsible for paying this amount. If it is financed, the buyer must continue to make payments for the amount determined by the commission. If the buyer has made payments on the vehicle to the lender, the dealer must reimburse the buyer directly for the principal paid. The Lemon Law does not address whether the dealer is responsible for reimbursing any interest that the buyer paid on the auto loan.