How to sell a car to a private party on payments

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?

Not an answer, just guidelines. Consider to have a legal contract created. Automobile titles allow for lienholders, which permits the new owner to register the vehicle, but the lienholder has rights to it. The legal contract should also require vehicle insurance, not just liability.

Problem is, the lien simply prevents resale of the vehicle without first satisfying the lien, and while it may convey some right of repossession, is it worth the hassle if you're a private citizen trying to sell a single car?

What makes you think someone else wants to do all of the "extra work" for free so that you can avoid all of the risk? Unless you really really trust the person then this idea is a firm no-go. Wanna take a wild guess as to why loan sharks charge insanely high interest rates? At $2,500 you should only sell the car for 100% payment. If you were selling for $20,000 then the other person needs to find a lender. There is zero upside to you personally assuming the role of a lender; unless you want to charge an insane interest rate and have the means to enforce the contract :-)

It's called a "bank". The buyer goes to one and borrows money. They give you ALL the money. Then they pay back the bank in instalments. If a bank won't trust them enough to lend them the money, why in the world would you?

7 Answers 7

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.)

When I was looking to finance a used car purchase (with the car as collateral), they had a 5 year vehicle age limit. Your buyer may have an easier time getting a personal (unsecured) loan.

@d-b They say that possession is nine-tenths of the law. To transfer possession on only five-tenths of the payment seems generous. :)

@d-b from the buyers perspective it obviously makes sense but 50% paid isn’t splitting the risk it’s assuming 100% of the same risks on half of the amount of money. We’re not looking at this from the buyers perspective this is all about the sellers perspective; anything below 100% payment is obviously in the buyers interest.

@d-b I think you need to reread the question: ‘A stranger offered to buy it at my asking price but wanted to know if I would accept (installment) payments. This sounds like a VERY BAD IDEA so I told him no.’ OP correctly recognized this arrangement as wildly asymmetrical in favor of the buyer and declined.

And you posed a further hypothetical of 50% down (which doesn’t address any of the risks associated it only changes severity) maybe you should write an answer.

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.