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Maximum Finance Charge Rates for 2017

By Michael W. Dunagan
TIADA General Counsel

Dealer Question:  What is the maximum finance charge rate I can use on a motor vehicle retail installment contract?

Answer:  Dealers who hold vehicle finance licenses issued by the Office of Consumer Credit Commissioner (OCCC) are authorized to finance the sale of vehicles, and are allowed to add finance charge or time-price-differential to the amount financed  (while the term “interest” is commonly used interchangeably with finance charge and time-price-differential, “interest” actually is the amount charged on  a loan of money, and should not technically be used in the context of financing the sale of a motor vehicle).
 
The legislature has established a sliding scale of maximum rates, with higher rates allowed on older cars.  The maximum rate that sellers of older vehicles can add to the amount financed is $15 per $100 per annum or, stated another way, 15 per cent add on (see accompanying chart).  Depending on such variables as the length of the repayment period, the amount of each payment, and the frequency of payment (weekly, bi-weekly, semi-monthly or monthly), the annual percentage rate on 15 per cent add on can exceed 26 per cent.

Chapter 348 of the Texas Finance Code allows sellers of vehicles to finance any unpaid balance at rates that generally exceed the rates of interest that can be legally charged by banks and traditional lenders. 

For purposes of setting maximum rates of finance charge, Chapter 348 establishes four classes of vehicles based of the vehicle's model year.  The attached chart shows allowable rates for calendar year 2017. These rates are valid on sales that take place between January 1, 2017, and December 31, 2017.  The maximum rates “roll over” on  January 1 of each year. 

The maximum rates of finance charges are stated in the Finance Code as "add-on" rates.  For example, for vehicles that fall into the class-four category, sellers can charge fifteen dollars per one hundred dollars financed per annum.  These are maximum rates, and any rate lower than the maximum can be charged. 

"Add-on" rates should not be confused with "annual percentage rates" which are the rates required to be disclosed on loans and retail installment sales by federal law.  The Annual Percentage Rate (or APR), which appears in the so-call “Fed Box”, will usually be substantially higher than the add-on rate.
  
All financing sellers, with a few exceptions, are required by federal law to disclose the rate of finance charge as an annual percentage rate, or APR, on their contracts.  Since Texas law sets maximum rates as add-on rates, it is necessary to first calculate the amount of finance charge the creditor wishes to assess within the legal limit, then determine the APR for disclosure purposes.  Federal Truth-In-Lending requires that any finance charge rate be advertised or expressed to a consumer as an APR.  It is thus improper to advertise or discuss add-on rates with customers.

The process of calculating the APR on contracts that provide for payments other than equal monthly payments is extremely difficult.  Most dealers rely on specialized software (often referred to as dealer management software, or DMS) to perform this function. (For a list of reviewed programs, see the OCCC website.

Without appropriate software, it is virtually impossible for a creditor who collects weekly, bi-weekly, or semi-monthly payments to accurately calculate an APR and other required disclosures. Dealers should not guess at or estimate an APR as incorrect disclosures are the basis for claims for statutory damages and attorneys fees.

Maximum Finance Charge Rates for Calendar Year 2017



Note that the chart also includes a column for what is referred to as an “Alternate Rate.”  This rate is 18 per cent APR for all four classes.  Many dealers have questioned what the alternate rate is, and how it affects the rates they can charge.

The alternate rate is an optional rate.  A dealer has the option to use either the standard or alternate rate.  As an example, a dealer financing the sale of a 2011 model- year vehicle can charge up to 15 per cent add-on (since this year model falls into Class Four) or the alternative rate of 18 per cent A.P.R.  Since the 15 per cent add-on rate translates to over 26 per cent A.P.R. on a typical weekly payment contract, a higher legal return can be achieved using the standard rate than the alternative rate. 

On the other hand, the sale of a class-two vehicle would be subject to a 10 per cent add-on maximum.  Since the actual yield on 10 per cent add-on would be lower than 18 per cent, the alternative rate would allow the seller a higher legal return.

Remember that the so-called “add-on rate,” which is the rate used to calculate the finance charge added to a contract, can't be used on the contract documents or in any communication with consumers.  In order that credit consumers can shop rates on an “apples to apples” basis, federal law requires all discussions about rates to refer to the chosen universal rate, or the A.P.R.  It would be improper to have an add-on rate appear anywhere on a contract.   


 

Comments

 
By: Bryce
On: 07/05/2017 22:35:18
I enjoy the report

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