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P. Simmons
P. Simmons, Lawyer
Category: Consumer Protection Law
Satisfied Customers: 34254
Experience:  16+ yrs. of legal experience.
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Situation: Car loan principal outstanding $1.53. Late fees

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Situation: Car loan principal outstanding $1.53. Late fees outstanding on car loan $3600.00. Finance company refusing to accept and/or apply our payments to remaining principal and then fees. Finance company demanding regular P&I payment of $689 monthly installment. until fees are paid off and will then apply any money to remaining principal. Also, if the $689 payment is not paid, finance company will resport adversely on our credit report. Questions: Is this legal?
Hi, My name is Philip. I am an attorney with over 16 years experience. Hopefully I can help you with your legal question.

The answer to the question "can the lender refuse to apply payments to the principal first when there are late fees pending" depends on the contract.

Late fees, and how they are applied, depend on the contract. This is a contract law question. When parties enter into a contract, the terms of the contract dictate how transactions, such as application of late fees, are to be applied.

Generally speaking, consumer credit contracts, like a car loan, have a provision that require any late fees be paid before principal can be paid. This is done, on purpose, to ensure that the lender maintains a security interest in the property. If the contract did not require that late fees be paid first, then the consumer could claim that there was no longer a security interest and claim a clear title.

SO I suspect that is the case for your loan. I suspect your contract requires that late fees be paid down before principal can be reduced.

A review of your contract will, I suspect, bear this out. Again, for a consumer credit contract, this is very common.

If there is such a provision? Then the creditor can enforce it...they can require that the late fees be paid before the principal is extinguished

I am sorry to have to bear bad news.
Customer: replied 3 years ago.

Hi Mr. Simmons. While I understand your answer, I am curious as to whether the finance company can still claim a "security interest" in the car when the remaining principal is only $1.53? I guess I am unsure of what the term "security interest" means. Please can you expand upon your response? Also, the finance company has stated that we may pay whatever amount we choose towards the late fees; however, such payment will not move the account forward unless it is a full P&I payment of $689, and they (finance) company can still report adversely on our credit report. Under the Credit Protection Laws can the finance company do this?

Thank you!

If a borrower owes money on the principal of the car...even a dollar? Then the lender still can claim that the principal has not been paid in full, so they continue to hold a lien on the title to the property.

In theory, if the principal was paid, the borrower could claim that they deserve clear title. practice it is not quit so clear...since even if the principal was paid, if there was money owed on the contract in the form of late fees, the lender could still claim they have a security interest...then it goes to the contract (the language of the contract) to sort out if, in fact, the lender will maintain a security interest, despite the principal of the loan being satisfied. And in most consumer credit contracts, there is language that protects the creditor (as you may expect...they are the ones who draft the contracts)

As for can the company continue to report this as a late payment?

Again, I may sound like a broken record...but it falls to the contract.

Under the law, the contract provisions can determine how payments are to be applied in the event of late fees. As I mention, most consumer contracts require that the late fees be extinguished BEFORE the principal can be reduced.

So what you describe? IF you have a significant late fee outstanding? And you are still under contract that requires a set payment each month? Then they can demand that payment each month. If you do not pay as required, they can report this to the credit reporting agencies.

Now...I would be concerned with the statement

such payment will not move the account forward unless it is a full P&I payment of $689,

That is not accurate.

The creditor is entitled to collect its late fees. But every dollar you pay MUST be applied to the account.

So if you are paying a partial payment, that may result in a late report to the credit reporting agencies. But they MUST give you full credit for the payment (so it must reduce the late fees accordingly)

P. Simmons and 4 other Consumer Protection Law Specialists are ready to help you

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