Car loans between individuals: what you need to know

Read our article on vehicle history reports to learn more.

The second step that any used car buyer should take is to have the vehicle inspected by a trusted independent mechanic. A good mechanic can find problems not listed in the vehicle history report, look for problems common to that model of vehicle, and evaluate any maintenance or collision damage repairs that have been performed. If the seller is reluctant to allow a mechanic to inspect a private used car, that should raise a huge red flag and you shouldn’t buy the vehicle.

Along with checking out the car, you’ll also want to make sure the salesperson is up to snuff. There is an age-old problem in the person-to-person used car market where small dealerships act as private parties to avoid licenses, consumer protection rules and taxes. These “curbstoners” are frequently found in parking lots or on automotive classifieds websites. The easiest way to identify an illegal dealer is to call them and tell them you’re interested in “the car”. If they ask you “what car”, you’ve probably found a sidewalk dealer. In some states it’s a legal business as long as they only sell a few cars a year.

Another way to identify a dealer posing as a private seller is to ask to see the car’s registration and driver’s license. If the names and addresses on the two do not match, you will need an acceptable explanation before proceeding. It’s a good idea to avoid sidewalks; if they’re lying about their dealer status, chances are they’re also lying about the condition of the vehicle.

How is the seller paid?

Payment is where a private loan can get quite tricky and patience is your best tool. After agreeing on a purchase price and terms, you will need to give the car’s VIN and selling price to your lender so they can finalize the loan and provide financing. They will usually send you a check which you can sign on behalf of the seller, write a check to the seller themselves, or make an electronic transfer to the seller’s bank account.

If the seller still has a loan on the vehicle, your lender will require it to be paid off before the sale can be completed. In many cases, they will work directly with the other lender to repay the loan and ensure a clear title can be issued. It may take some time for the seller to get a title deed from their lender, so as a buyer you may need to be patient. In some states, once the seller receives the title, they must go to the DMV to have the lien holder (lender) removed from the document before they can sell the car, further delaying the sale.

Before handing over a check, a private seller must have a clear title that they can hand over to you. It’s an absolute rule for car buyers: no title, no check.

Whatever you do, it is never advisable to bring cash when buying a car from a stranger. It’s a good idea to meet the seller at your lender if the financial institution has physical locations. When you do, the seller can verify the authenticity of the check and you’ll have the comfort of not being alone.