Tips on Buying Cars: Rental (Conditional Sale), interest contracts, interest contract

Question
Hi Jeremy,
We "purchased"(the lease terms actually read, "Rental/ Conditional Sale), a trailer from a leasing company back in December '08.  The rates/ billing period states $229.00 a month for 36 months with a $101.00 buyout at the end of the 36 month term.  This trailer was in an accident last month and it has been deemed a total loss by our insurance company.  We are finding out that with a conditional sale, the $229.00 per month for 36 months ($229.00 x 36 = $8,244.00) must be paid in full regardless of how long we had the vehicle.  Unlike a "loan", if paid off early regardless of choice or necessity, you do not pay all of the interest on the loan if it has not yet accrued.  Are you familar with this? In essence, we are paying all of the use fees up front.  We did not realize this when the documents were signed.  Do you know if there are certain disclosures that must be shared with the customer with this type of financing? There is not an early "buy-out" clause in the documments that addressed this issue.

Debbie

Answer
Debbie,

Thanks for your question.  It depends on what type of contract it was.  If it was like a mortgage contract or a "compounding interest contract" then yes you will have to pay all.  If it was a "simple interest contract" like most motor vehicles are then you should only have to pay the principle and only interest up to the point in which you pay it off.  Sometimes contracts like these are compounding interest contracts which are contracts that require that if you should pay the unit off early, you will still have to pay ALL of the interest charges and fees.  These types of contracts are perfectly legal and are usually found in trailers, mortgages, installment loans for merchandise, etc.  Its a horrible contract, but that is how most of them are done, and it is very hard to find a simple interest contract in items such as these.  With a vehicle though, they are all simple interest contracts as required by law.  

At the top of the contract you signed it should disclose what type of contract it is and then the disclosures are usually found on the back of the contracts.

Hope this helps some.

Thanks - JB