Car Loaner Agreements: Definitions, Terms, and Issues to Consider

Car Loaner Agreement Defined

A car loaner agreement is a legal document used to facilitate the temporary exchange of a vehicle between the lender (owner) and the borrower (renter). It is a legally binding document meant to protect both parties involved in the transaction, ensuring their mutual interests are safeguarded during the rental period. For the lender, it provides proof of the terms and conditions under which the vehicle is being loaned out, including the duration, condition, and any limitations on its use. It also serves as a record of the condition of the vehicle when it is lent out, which can be useful in case of any court disputes later on.
For the borrower, a car loaner agreement outlines the responsibilities and limitations of their use , ensuring they understand the conditions under which they can operate the vehicle. It may include agreements on mileage, fees for extra mileage, and restrictions on uses such as lending to others or off-roading. It can also protect the user from any hidden costs. Many agreements include a guarantee from the owner to pay for fuel up to a certain mileage, taking into account that there might be an extra cost to the owner.
A car loaner agreement is often used in the automotive industry to assist customers in test drives and loaner vehicles while their car undergoes servicing. It is a legal contract usually consisting of a simple text or form allowing an owner to lend their vehicle for a limited period, essentially enabling the lender to temporarily transfer the vehicle to the borrower.

Essentials of a Car Loaner Agreement

When a customer is required to sign a car loaner agreement to take a car loaner, there are a few common terms that one can expect to see. The first is that the borrower will agree to return the loaner vehicle in the same condition that they received it, or fairly close to the same condition. For example, the car may have a few scuff marks on the floor mats, or features some light scratches from everyday use that should be expected. Either way, the description of the current condition should be memorialized in the agreement so that the borrower does not argue that the car was already in a dilapidated condition when they took it out. The next terms that one can expect to see address the duration of the loaner period, that is, how long the car is loaned out. This is generally limited to the duration of the service that is being performed, and the agreement will include provisions that dictate what happens if the repairs take longer than anticipated. Next, the agreement will include terms on the borrower’s assumptions of full responsibility for damages that result from their use of the vehicle. For example, many agreements will exclude wear and tear from the requirement of responsibility for damages, but will require the borrower to be liable for any damage, even if accidently caused by the borrower. Additionally, the loaner agreement will contain indemnification provisions, as well as an acknowledgement that the borrower has the ability to procure their own insurance to cover any liability while driving the vehicle. Next, many agreements contain a provision that gives the borrower a certain number of days to bring the car back into the lender’s possession at the end of the loaner period. This may be due to some temporal restraints on the borrower’s part that will make it difficult to return the car immediately. Generally, if the car is not returned within the stipulated time frame, the loaner provider will begin to charge the borrower fees of some sort for misuse of the car. Finally, many agreements contain the borrower’s acknowledgement that the lender holds all rights and title of the vehicle at all times and that the borrower will not attempt to purchase the vehicle, but rather, will return it. The borrower should also acknowledge that it will be held responsible for the vehicle during the time during which it is in the borrowers possession, and, therefore, should be ensure to maintain liability insurance for the vehicle.

Responsibilities and Rights

The legal obligations and rights of the lender and borrower under a car loaner agreement generally stem from contract law and consumer protection statutes. Broadly speaking, the lender of a car loaner, whether an individual or a business, may be held liable for things that happen to the loaned vehicle and any resulting damages to others if he or she has the "right to control" the vehicle at the time of the accident. This means if the lender still has the right to repossess the vehicle, he or she may be liable for injuries and damages the driver causes with the car loaner. Additionally, depending on the lender’s identity, other legal principles may apply. A dealership, for instance, may be found liable for a driver’s negligence under the principle of "respondeat superior," which is the doctrine that holds employers liable for employees’ negligence during the course and scope of employment.
The borrower has rights and protections under consumer law. Any agreement to loan a car, whether for free or for money, regardless of the terms, is a consumer credit transaction under the Texas Credit Title and the federal Truth in Lending Act. Thus, the lender must make written disclosures to the borrower regarding prepayment penalties, fees, costs, amount financed, APR and payment schedules. If the lender is cutting a deal with the borrower that requires interest to be paid, then the loan must comply with the Texas Finance Code and the Truth in Lending Act. Otherwise, the borrower can sue for damages, attorneys’ fees and a penalty of twice the finance charge not to exceed $2,000. On the other hand, if a dealership has a car loaner program, such as loaning a car while servicing a vehicle, then the dealership must comply with the Consumer Leasing Act. That is, a leasing company "must provide each lessee with a copy of the Consumer Leases Act disclosure form before the signing of the lease agreements."

Creating a Car Loaner Agreement

When drafting a car loaner agreement, it is important to keep several key considerations in mind. Your company’s policies with regard to the operation of a company-owned vehicle should be considered and included. For example, the company may mandate that all company-owned vehicles are not to be taken off company premises overnight. If you have such a policy, then it is important that your Car Loaner Agreement incorporates that provision. A failure to include this type of provision leaves open the possibility that the to-be borrower may be inclined to take the vehicle home at night, and a resultant liability dispute may ensue as to whether the individual properly had the company’s permission to take the vehicle off premises. This is a situation no company wants to find itself in. Furthermore, if the company’s policy is that the vehicle is only to be utilized for company purposes that are in furtherance of its business, then this should be addressed as well. Proper and thorough insurance coverage is also something that should be thoughtfully considered in the development and drafting of your Car Loaner Agreement. In today’s world, companies are often inclined to try and do more for their customers. This is understandable, but at the same time the mandatory liability coverage that is put in place for the company’s protection must be guarded. For example, if the company mandates or allows the loaner of the company’s vehicles when the vehicle is not actually being utilized for company purposes, it is impermissible for the company to be liable for any wrong that may occur to a third party as a result of the use of the vehicle by the borrower if the vehicle is used in furtherance of the borrower’s own personal matters. With that, it is prudent for companies to include language in their Car Loaner Agreement that protects the company from liability if the vehicle is used for a purpose other than that which is directly related to the company’s business . A provision should therefore read as follows: "The Borrower agrees that if the Vehicle is used other than in furtherance of the Borrower’s relationship with the Company and for the designated purpose, and any damage occurs to a third party as a result of said use, the Borrower shall be fully responsible for any damages and the cost to defend any claim arising out of said use, and the Company shall have no liability whatsoever for said use." Also, if the to-be borrower has plans for a long trip, then the company should consider interposing a provision in its Car Loaner Agreement that requires that the to-be borrower give prior notice of all travel plans. With this, the company will be aware of the distance of the intended trip, the location of the intended trip, and whether or not the Company approves of the trip. Furthermore, if the to-be borrower needs a rental vehicle in order to continue on with a long-distance trip in the event the Company’s vehicle breaks down, then the Car Loaner Agreement should also address the Company’s position with respect to that. With regard to parking violations, which is a common scenario, the Car Loaner Agreement should also address parking violations. It should indicate that the Company is not responsible for any parking tickets or electronic tolls incurred by the borrower in conjunction with its use of the vehicle. Lastly, the Car Loaner Agreement should clearly indicate that the vehicle can only be operated by individuals who actually reside at the borrower’s residence. With this, the Company will be aware of each and very individual who will or may be operating the vehicle. If a loss is incurred by a driver who does not reside at the borrowers residence, then the Company will have a basis for contending that the borrower is not in compliance with the terms of the agreement.

Pitfalls to Watch For

Common mistakes people make when entering into a car loaner agreement and how to avoid them:
The first mistake people tend to make is not properly reading the agreement before signing. It’s very easy to gloss over a document with lots of fine print and opt for the "just sign here" approach, but it is always best to read an agreement in its entirety. Though lease agreements tend to be standard, there are some differences between leases and the agreements dealerships use for their loaner cars. For instance, some dealerships will require that you provide your social security number, and make a lot more copies of documents than is standard in a lease transaction such as, a copy of your driver’s license, insurance card, credit card and vehicle registration. At the same time, the section related to your assumption of liability for a lost or stolen car is much stricter. Most lease agreements require that you assume liability for damage or losses if you used the car in violation of the agreement; typically this means that you drove without insurance, without a license, or under the influence. Lease agreements rarely limit your liability if you drive the car for other purposes, such as personal use. A loaner car agreement, on the other hand, might require a total assumption of liability for any sort of loss or damage, even if the facts are not entirely your fault. It is important to be fully aware of these sorts of terms so that you are not caught by surprise if and when they are enforced.
Another mistake people make is not getting proper insurance coverage for the car. If the car is being used for business purposes, then it is important to speak with your insurance about the proper coverage. In many states, a party providing a rental car who provides it for more than 30 days can be considered a "motor carrier," and have strict obligations to ensure that the parties hiring their cars have adequate insurance. A common misconception is that signing a paper that says you are personally liable for any accidents that happen during the time period that you have possession of the car means that the party providing the car is not liable. This is not true, however. When making this sort of agreement, both parties should be properly insured, or else you run the risk of personal liability covered under your own personal policy, if the dealership’s policy is inadequate. If you are not driving the car for business purposes, then it is still advisable to check with your insurance to make sure that the proper coverage is provided for "loaner" usage of a car. When in doubt, use your own personal policy, or provide proof of insurance for the car to verify that the insurance is adequate.
The next mistake is not asking for a receipt for the car. Even if the dealership "trusts" you, it is always good to establish a paper trail. For most lease agreements, a receipt for the car is normally provided. However, some lease agreements provide that the receipt must be returned with the vehicle at the end of the loan period. In this case, you should make a note of the mileage and fuel level when you leave the lot with the car. If you do not return the car to the proper condition, then the dealership cannot provide you with a receipt until after the end of the loan period. The City also provides receipts for their vehicles, but sometimes, especially when there are close outs occurring at the end of their month, they will forget to provide the correct receipt. When this happens, note the mileage on the dashboard, and make a quick note of your starting mileage when the vehicle was dropped off at the dealership. The City absolutely requires that all vehicles have proper receipts, so it is advised that you ask for one promptly. If you do not get one right away, make sure to call the number on the invoice you received from them.
The last mistake is not making sure the person who is giving you the car observes you driving, unless you intend to simply use the car to go home and come back. This ensures that the responsible party sees what you are doing with the car after you take possession.

Frequently Asked Questions Regarding Car Loaner Agreements

What happens if I try to take a loaner car out of state?
Under most ordinary circumstances, the dealership wants you to use the loaner car only in the vicinity of the dealership. If you were seriously inconvenienced by this trade, you might be able to have the terms enforced against the specific facts. However, unless you can show that your loaner car was not being repaired and cover fees for the use of your own car and the particular inconvenience of location and cost of replacement car , it is unlikely that you would succeed in enforcing the terms of the loaner agreement.
Do I need insurance to operate a loaner car?
It is assumed that you have insurance on your own vehicle. The loaner agreement could require you to have your own property damage coverage so that your insurance acts as primary coverage on the loaner vehicle. The dealership’s insurance may be excess coverage or limited coverage for your use of the loaner vehicle as determined by the language of the loaner agreement.
What happens if I damage a loaner car?
If a loaner car is damaged while you are making use of it, under most circumstances, the dealer will charge to repair the damages. Generally, the dealer would be expected to have the vehicle repaired and charged to your service contract.