How to finance a car you are buying from a private seller

A dealer can hand you a loan contract along with the keys. A private seller can't, which is why a lot of buyers assume a private sale has to be cash. It doesn't. Banks and credit unions make private-party auto loans, and the process is only a few steps longer than dealer financing. The difference is that you have to start it before you find the car.

Get preapproved first. Apply with your bank or a credit union and ask specifically about a private-party purchase, since some lenders only finance dealer sales and others price private-party loans a little higher. Preapproval tells you your maximum amount and rate, and it lets you negotiate like a cash buyer. Sellers take an offer more seriously when you can say the money is already approved.

Lenders also have rules about the car itself. Expect a minimum model year or a maximum mileage, a minimum loan amount, and a cap based on the car's value. The lender wants the car worth at least what it's lending, because the car is the collateral. Check those limits before you fall for something they won't finance.

How the money and the title move

Once you and the seller agree on a price, the lender usually asks for the VIN, mileage, and price, a copy of the seller's title, and the seller's contact information. Some want a signed bill of sale before they fund, and some want an inspection. Then the lender pays the seller directly, often with a check made out to the seller, and the title is transferred into your name with the lender recorded as lienholder. You make payments to the lender, and when the loan is paid off the lender releases the lien.

It gets more interesting when the seller still owes money. Plenty of private-party cars have a loan on them, and the seller's lender holds the title. Your lender pays off the seller's loan first, then pays the seller whatever is left. The seller's lender releases its lien and sends the title, and the title is reissued in your name with your lender on it. Closing at a branch of the seller's lender, or of your own, keeps everyone in one room while the money moves. See buying a car that still has a loan on it and the seller's side in selling a vehicle with a loan.

Don't hand over a deposit to hold the car until you know the lender will approve this specific vehicle. If the car is older than the lender allows, or the title has a salvage brand, the loan can fall through and you're left asking a stranger for your money back.

Before funding, do the checks you'd do on any private purchase: run the VIN, confirm the title matches the car and the seller, and pay for an inspection. A lender's value check isn't the same as a mechanic looking at the car. See VIN and odometer checks and the pre-purchase inspection.

Insurance has to be in place before you drive, and the lender will require comprehensive and collision coverage that lists it as loss payee. Call your insurer with the VIN as soon as the deal is set. See insuring a car with a bill of sale.

There are two other ways to pay over time. An unsecured personal loan doesn't put a lien on the car, so the title transfers cleanly, but the rate is usually higher than a secured auto loan. The other is seller financing, where the seller agrees to take payments directly. That only works with a seller who trusts you, and it needs a written promissory note alongside the bill of sale. See selling a car on a payment plan.

Whatever the payment method, the sale gets a bill of sale with the price, date, VIN, and both signatures. Your lender may ask for a copy, and the registration office uses it to figure the sales tax.

Sources

• Consumer Financial Protection Bureau, Auto loans