Limiting Minor Borrowers to Auto Loans

In Illinois, the general rule is that minors cannot enter into legally binding contracts, since an agreement with a minor is voidable by the minor until they reach the age of majority (which is eighteen in Illinois). There are some exceptions to this general rule, as in cases of emancipated minors or contracts for the purpose of obtaining “necessities,” such as food, lodging, clothing, and education. However, “necessities” typically do not include a minor’s automobile, even if the minor uses the automobile to earn a living.

Regulation B prohibits discrimination against a credit applicant based on age — provided that the applicant has the capacity to enter into a binding contract. Consequently, we believe you may limit the kinds of loans that you extend to minors so that they may only apply for loans secured by an automobile.

Title to the Vehicle in the Minor’s Name

If title to the vehicle is in the minor’s name, you could run into issues when trying to enforce your security interest. Under the Illinois Uniform Commercial Code, a security interest generally attaches to collateral when value has been given, the debtor has rights in the collateral, and the debtor has signed a security agreement providing a description of the collateral. While the minor could sign a security agreement providing your bank a security interest in the vehicle, you would be unable to enforce that security agreement against the minor if they decide to void the security agreement before turning eighteen. Also, if title to the vehicle is only in the minor’s name, you would be unable to enforce the security agreement against the parent or guardian since they lack sufficient rights in the collateral to which a security interest could attach.

For resources related to our guidance, please see:

• Dixon National Bank v. Neal, 5 Ill.2d 328, 336 (1955) (“It is well established that contracts of minors which inure to their benefit are not void, but voidable only at the election of the minor on arrival at maturity. . . . A minor may disaffirm a contract made by him during minority within a reasonable time after reaching his majority or, he may by acts recognizing the contract after becoming of legal age, ratify it.”)

• Illinois Code of Civil Procedure, 735 ILCS 5/2-619(a) (“Defendant may, within the time for pleading, file a motion for dismissal of the action or for other appropriate relief upon any of the following grounds. . . . (8) That the claim asserted against defendant is unenforceable because of his or her minority or other disability.”)

• Fletcher v. Marshall, 260 Ill.App.3d 673, 675 (2nd Dist. 1994) (“A contract of a minor is deemed ratified if the minor fails to disaffirm it within a reasonable time after attaining majority. . . . Also, a minor ratifies a contract if, after becoming of age, he ‘does any distinct and decisive act clearly showing an intention to affirm [the contract].’”)

• Emancipation of Minors Act, 750 ILCS 30/5(a) (“A mature minor ordered emancipated under this Act shall have the right to enter into valid legal contracts, and shall have such other rights and responsibilities as the court may order that are not inconsistent with the specific age requirements of the State or federal constitution or any State or federal law.”)

• Fitzpatrick v. Ill. Dept. of Public Aid, 52 Ill.2d 218, 221 (1972) (“It has been established by this court that a minor’s estate may be liable for necessities furnished to the minor.”)

• Social Security Program Operations Manual System: Validity of Loans to Minors (“A loan with a minor is enforceable if it is entered into for the purpose of obtaining necessities; necessities includes items such as food, clothing, lodging, and education, but typically does not include automobiles, even if used to earn a living.”)

• Old Mut. Casualty Co. v. Clark, 53 Ill.App.3d 274 (1st Dist. 1977) (“Since a minor has a right to disaffirm a contract for an automobile . . . the default judgment, entered November 8, 1973, made the contract void in its inception on June 12, 1970, as between William A. Clark and the seller.”)

• Regulation B, 12 CFR 1002.6(a) (“Except as otherwise provided in the Act and this part, a creditor may consider any information obtained, so long as the information is not used to discriminate against an applicant on a prohibited basis.”)

• Regulation B, 12 CFR 1002.2(z) (“Prohibited basis means race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract