How to sell a car to a private party on payments

Question

I am selling an old car for US$2500. A stranger offered to buy it at my asking price, but the stranger wanted to know if I would accept (installment) payments. This sounds like a very bad idea, so I declined.

But I got to thinking — how would selling a car to another private party on payments even work?

I suppose I could keep the title and let him have the car until it is paid in full, but then I would have to repossess it somehow if he never made the final payment. In this case, would I have to report it to the police as stolen? Does the buyer have any legal right to keep the car if I let him drive it away without the title? Could I be liable if he gets in an accident? How else could this work? Is there a way it is normally done that wouldn't involve a lot of risk for me or a bunch of extra work?

Answer 1

You’re asking about a hypothetical situation where someone sells a vehicle privately on an instalment plan.

Even with (commercial) car dealers, my experience has been that with car sales (as opposed to hire-purchase and the like), the dealer gets their money in full upon release of the vehicle. Any finance is done with another entity. The lender gives the full amount to the dealer and then collects payments from the borrower. In this way, car dealers can get on with the job of buying and selling cars without getting mired in loan defaults.

If you go with this model, you’d introduce the purchaser to a lender, then get your money in full when you hand over the keys. The buyer pays the lender back in instalments. As this is merely a hypothetical, it’s worth noting that you might get a fee from the lender for the arrangement, depending on your negotiating skills. Perhaps a car dealer would be prepared to let you come under their arrangements for a fee - effectively, you’d sell to the dealer and the dealer on-sells the vehicle. I’d imagine the fees involved would make this unattractive, though: there will likely be a big difference between what the final buyer pays and what you get.

If you want to avoid the third party, there is still the question of risk: who assumes the risk?

If you are prepared to assume the risk, you will need to determine how that risk is quantified. After background checks etc, including credit-worthiness, you can either absorb all costs and risks, and hand the keys over with a handshake (or foot-tap / elbow-knock in these COVID times), or you can perform your own actuarial research and pass them on via fees and interest, just like the professionals do. You’ll need to work out contingencies in case the buyer defaults on the payments.

Alternatively, the buyer could assume the risk. Here, the buyer pays you by instalments and only gets possession of the vehicle when the last instalment has been paid. The buyer would then be the one who has to plan for contingencies in the event that you default on the sale (the vehicle gets damaged, is sold or becomes unroadworthy, or you fail to pay the regular licensing fees, etc). You’d also need to work out what to do if the buyer defaults on the instalments.

All told, consumer-to-consumer lending in relation to private vehicle sales is a high-risk, messy affair. Do not do it without professional advice. (And this answer is not professional advice.)

Answer 2

Is there a way it is normally done that wouldn't involve a lot of risk for me or a bunch of extra work?

This is the real question and the answer is no. The other answers go over the general reasons why you wouldn’t do this. As referred to in the other answers generally either the buyer arranges financing themselves at their bank or the dealer will help place a loan for the buyer; the dealer gets paid in full and doesn’t carry lending risk.

There’s a somewhat common business model in the US referred to as a “Buy-here, Pay-here” used car lot. These dealers typically have very old cars on the lot, for somewhat inflated prices, with loan terms that are utterly awful. They generally don’t really bother checking your credit, but will call an employer to verify you’re employed. And these companies aren’t car dealers as much they’re collection agencies. The way it works is someone with bad credit needs a car and can pay $50 every other week. You sell them a car worth about $1,500 for $2,500 but they’ll pay you $500 today plus $50 every other week for 3 years. Then you add them to your call list. If they don’t pay you check the gps tracker, you send a very scary looking person to go pick the car up and you put it back on sale. This works, ultimately, because you’re collecting on 20 cars (or whatever), not one. And no one is going to “Gone in 60 Seconds” you and put it in a container to another country to actually steal it from you because no one really cares that much about a miscellaneous 15 year old Nissan Sentra that’s in not great shape.

Really, the business isn’t about selling cars because you’ll sell the same car several times; it’s about creating the debt to collect then being very persistent in collecting then ultimately repossessing the car.

The question for you is would you lend this stranger $100? (Not even the $2,500 they’re asking to borrow.) And I mean lend in the true sense of the word, you fully intend to receive the money back and will pursue collection when the borrower inevitably has an emergency. And the answer is probably no. Almost everybody is bad at this part of lending, regardless of what the collateral to the loan is. Everything else is downstream from this, insurance, interest rate, borrower qualification, loan documentation, whatever. It doesn’t matter because the reality is you’re probably not ready pick up the phone and assert yourself in to a conflict with your unwilling borrower who doesn’t think they should pay you if the water pump broke or they got sick and couldn’t get to work this week; and that’s why you shouldn’t get yourself in the business of direct lending.

Buying a car is actually two transactions. One transaction is the price of the car, one transaction is the price of the money (the loan). This person wants you to become a bank, that’s why this is a bad idea. In your situation your buyer is requesting you give up possession and utility of your car and lend him $2,500; and you get no collateral apart from the car he will have legal possession of.

This question has basically nothing to do with whether you file a police report if your car doesn’t come back and you haven’t heard from your borrower (and no this is its own thing called “theft by conversion” and there’s very little the police can do when the person who is legally allowed to have the car just isn’t returning your phone calls, though depending on your jurisdiction you may have to file a police report to be legally in the clear to repossess the car procedurally.). Let the buyer arrange their own financing, and if there are no buyers at $2,500 lower the price a little. Taking $2,250 for the car is still an order of magnitude better than getting the first four payments from this person and nothing else.

Answer 3

Selling an item by becoming the lender, involves nothing but risk. When a bank makes a car loan, they calculate the risk.

• They estimate a% will run into financial trouble.
• they estimate b% will fail to insure the vehicle and it will be lost to accident or theft.
• They estimate c% will just stop making payments for other reasons.
• They factor in inflation risks.
• They factor in the declining value of the car.
• They factor it the costs of repossessing the vehicle and preparing it for sale if they have to do that.
• They factor in their costs.
• The know how much profit they need to make.

If they do this right and make many loans each day, then they meet their cash flow goals.

You have no idea what those numbers should be. You also have to realize that if one of those risks happen you lose some or all of the investment.

If you want to do this, you would have to contact the state where the purchased vehicle will be registered so that your interests are protected. You have make sure your name and the new owners name is on the title. This should make it harder to sell the vehicle without you getting your money. You might have to go with them to DMV to sort out the paperwork. You will have to file paperwork with their insurance company so that you are alerted if they modify the policy, or if they are in an accident or make a claim. That sound like a lot of work for a $2,500 vehicle.

Answer 4

What if your buyer doesn't pay his insurance (or bother to carry full coverage) and wrecks the car? Then you're reduced to having to sue for your money. You don't bear legal/financial responsibility for any accidents they have as long as they (the buyer) are titled as the owner and you simply put a lien on the vehicle. Still, any uninsured/underinsured accident leaves you at risk of losing the balance of what you're owed - if the guy wipes out the car,do you think he's going to still make his payments?

Many auto lenders require borrowers to carry full coverage naming them as beneficiary in such a case, and if you let the coverage lapse then you're in breach of contract and they can repo the car.

Bottom line - NOT a good idea, especially with someone you don't know.

Answer 5

Contrary to other answers, this is possible and does happen. (Other answers are correct that it's often a bad idea, but that's not part of your question.)

This is called owner financing or seller financing. It's more common with houses, but it's possible with a car. In general, this kind of financing follows the same steps as financing from a corporate lender: Create a contract that outlines the rights and responsibilities of each party, such as what you can do if the borrower defaults on payments. Use structures such as liens to secure those rights.

There are ways that you can (somewhat) reduce the work involved with owner financing, such as using a loan servicing company. Those are companies that specialize in managing loans, like collecting the monthly payments and following up if something is late. However, you have to find one that is interested in your specific loan and of course they take a cut. (I'm truly not sure if there are any that would be interested in a normal, low-value car loan.)

One more contrast to other answers, there are definitely good reasons for doing owner financing as a general concept (not for this specific car).

1. Get more money, less goes to the bank. (In the case of your car, the amount in question is too small for this to be a big deal.)
2. Spread out money over time, turn a lump sum capital gain into a semi-passive income. (Likewise, the value of your car is too small for this to factor.)
3. Sell things that would otherwise be difficult to sell, where the buyer can't get a loan from a bank... e.g. a house that is uninsurable probably won't qualify for a bank loan, or if you want to sell to a specific person, like a relative, who won't qualify for a bank loan. (For the value of your car, you can probably find someone who can just buy it outright, and you don't have any attachment to this specific buyer.)

Answer 6

I personally would never recommend loaning money to a stranger. However, there are some used car dealerships that will sell your vehicle on consignment. Typically they charge either an upfront fee, a percentage of the sale, or both, and they handle cleaning the car, showing it, and selling it. Many of them handle financing too.

I can't be sure of this, but I would guess that if you brought a car and a buyer directly to the store that does this, that they would be happy to give you a significant discount in order to facilitate the transaction. I'm also guessing that the buyer would likely be willing to pay any additional fees so it wouldn't cost you anything, since you're doing them a pretty significant favor in the first place. Of course, this also assumes that the buyer is eligible for financing, though, (for better or worse) used car dealerships tend to know how to make something work, even for those with poor credit.

Answer 7

It's a great theoretical question. In my opinion,

• There is No Way to do this

Why do I say so?

• When BANKS, for goodness sake, hold the title on a car, even they know that in fact it is: worthless. The only reason the system works is that they do enough volume to write off losses.

All of your thoughts are spot-on:

"but then I would have to repossess it somehow if he never made the final payment"

Exactly correct. Note that even banks can barely repossess a car. The "repo-man" is just a myth, it may come in to play with expensive vehicles. But cars are: worthless. One dent and it's less than worthless.

Would I have to report it to the police as stolen in this case

Yes, but: the cops don't care about civil matters. The guy would just say "He sold it to me - here's the contract" and then the cops would be incredibly angry at you. Think about it: can banks call the cops when someone defaults?

Does the buyer have any legal right to keep the car if I let him drive it away without the title

Certainly! The title's just some piece of paper. He'd have another piece of paper saying that: you sold it to him. OK, so you could have a "legal battle". That would cost you two, maybe three hundred thousand dollars.

Also say in theory you "won". The guy could take a quarter from his pocket, and run it down the length of the car, and then say "oh, you won, take it, here's the keys". The vehicle would be worth less than nothing.

Could I be liable if he gets in an accident?

100% yes. Any competent accident attorney would go after all parties incredibly aggressively. It would be easy to argue that you were (say - just one example) operating a lease service with no third-party insurance.

Great question!