Private Sale Car Loans
Buying a used car privately can be a smart financial move, but you need to ensure you’re aware of the pitfalls.
In this article, I’m going to show the best tips and tricks to getting a car loan for use with private sellers.
Buying a car privately is the most popular way to purchase a car in Australia.
Provided you protect your commercial interests effectively, buying a used car privately can represent a real saving over purchasing a similar used car from a dealer.
The following example taken from carsales in September 2018, shows the dealer price is $3,999 more. “Tell him he’s dreaming”
Unfortunately, there are fewer consumer protections built into the private car sale process, which means you need to be an effective advocate for your own self- interest.
Private sale-specific car finance is available, however some mainstream lenders are reluctant to provide this kind of finance because of the risk posed by fraud among private sales.
About Private Sales Car Loans
Specialist private sale car finance lenders appreciate the time-and price-sensitivity of private sale transactions.
With some simple checks and balances in place, the risk of fraud can be minimised, and purchases can proceed smoothly.
Occasionally, mainstream lenders might offer an unsecured loan product to private-to-private car buyers. These kinds of loans typically come with a relatively high interest rate, and you might find in many cases that a specialist private sale car loan proves to be a far more affordable finance product.
Can I get private sale car finance?
Yes, if you meet the criteria.
Lenders have established approvals processes, and your application will be assessed against several criteria including:
- Employment history
- Credit rating
- Earnings capacity
- Disposable income
- The capital (deposit) that you intend to put towards the purchase (your equity)
|720+||Score 720 or higher and you’ll have a good chance of obtaining loans at the best interest rates. These loans may require less documentation and paperwork, and potentially less - or even no - down payment or collateral|
|680 - 719||Score in this range, and you’ll usually be able to negotiate good items|
|620-679||Landing in this range will place you under “standard” company rules, giving you less flexibility in choosing better loans or services.|
|580-619||You’ll be reviewed with a critical eye and will need compensation factors to be approved by companies for most loans or services.|
|under 579||Not a happy place to find yourself. You’ll typically be required to provide a substantial down payment/ collateral and/or pay a higher interest rate.|
In many cases, to mitigate the risk of fraud, the lender will require information about the specific vehicle you intend to purchase, such as:
- A copy of the registration papers
- A copy of the current owner’s drivers licence
- The current owner’s banking details
- An invoice from the current owner for the sale
What if the car I am buying is currently financed?
It’s possible to buy a car that is currently used as the security over the owner’s existing loan.
In this situation it is essential to ensure that this pre-existing debt is repaid in full, and the encumbrance is thus removed from the vehicle during your purchasing transaction.
In this way, neither you nor your lender will be burdened by the previous owner’s loan security (the ‘encumbered’ vehicle).
For this reason, if the car you intend buying is subject to existing finance, you will need to supply your lender with a payout letter from the current lender.
In this case, your lender will arrange to repay the existing debt in full, direct to the financier, thus discharging the encumbrance. The balance of funds owing (if any) will be separately transferred direct to the seller.
Never pay the seller the full sale amount direct, in this situation. If the seller then does not repay their loan, the car you have purchased may be repossessed to cover the debt - leaving you without a car, and a debt of your own to service. Obviously, this is a very confronting situation best avoided.
How is the loan secured?
In general, private sale car finance is secured by the vehicle you purchase.
Under this arrangement, the lender is entitled to take possession of the vehicle in the event of a default, with a view to selling it to recover any outstanding funds. This reduces risk to the lender, and results in the loan attracting a lower interest rate than otherwise.
Depending on the nature of the vehicle, its age, and other factors considered during the application process, the lender may require a cash contribution (deposit) from you.
A particular contribution of owner equity is sometimes required to mitigate the lender’s perceived risk - for example, if the vehicle is projected to depreciate over time and its future value is deemed to be less than the balance of funds owing on the loan.
As a condition of the loan, the lender might also require you to take out comprehensive insurance over the vehicle, and for the lender to be named on the policy.
What is the interest rate?
Interest rates vary with financial risk. Lenders are particular about risk, and they consider many factors in approving finance to applicants.
At the end of the day, the factors considered form a financial risk assessment for the lender, which allows them to determine the relative risk of each loan they approve.
The interest rate offered varies in relation to this perceived risk. Obviously the loans representing the lowest risk attract the lowest interest rate, and vice-versa. This is why it’s important to manage your debts responsibly and do all you can to maintain a good credit history.
How much can I borrow?
Most private sale car loan lenders offer loans from $5,000 and upwards, over terms from 12 months to 60 months (five years) - sometimes longer, depending on the applicant’s credit history.
In practice, the amount you can borrow is generally limited by the reasonable value of the car you intend buying and your capacity to repay the loan.
In assessing your capacity to repay, lenders consider your credit history, your occupation and the nature of your employment, together with your income and existing expenses (such as living costs, rent, mortgage, credit cards, and other debts).
How do I protect my interests when buying privately?
Statistically, the incidence of fraud is higher in private sale transactions than when buying from a licenced car dealer, and fewer consumer safeguards are built into the private sale process.
It’s important to act effectively to protect your own interests throughout the private sale process.
Private sellers commonly misrepresent the condition of the vehicle, its finance status, or its status as a repaired write-off.
Therefore, as a buyer it’s essential to investigate the vehicle thoroughly before committing any funds to its purchase.
As a minimum, a trusted, independent expert should inspect the vehicle in respect of its mechanical condition, and also look for evidence of dodgy crash repairs. One good way to investigate the vehicle against administrative benchmarks is via a CarHistory report.
This $37 report will identify:
Identify repaired write-offs
Look for evidence of odometer wind-back
Insurance claims history
What price should I pay for the vehicle?
There is no ‘one size fits all’ answer to the question of how much you should pay.
Obviously you can investigate asking prices via online classifieds, and make some allowance for the negotiability of pricing.
Another good price-ballparking resource is Redbook.com.au (use the ‘research’ tab, which is free).
Bear in mind that Redbook pricing is for standard vehicles in average condition for their age and with average kilometres travelled.
If the vehicle you are considering is heavily accessorised, or has more (or fewer) kilometres than average, or is in above average condition, some allowance in the pricing must be made for that.
Remember that private sellers typically have a target price in mind, and offer the vehicle for sale above that price, thus ensuring a buffer for negotiation.
What if I am a business owner or self-employed?
Business owners or the self-employed are certainly entitled to purchase vehicles privately. However, it is generally worthwhile talking to your accountant or financial adviser about this, as an alternative finance structure, such as a chattel mortgage or commercial hire purchase, might confer specific tax advantages in some situations.
Getting a car loan for a private car sale is as easy as it seems, you just need to ensure you know how to protect your interests when buying from a private seller.
Make sure you get an independent vehicle inspection and a car history report - you don’t want to end up with a lemon!
Buying privately is the most popular way to buy a car in Australia and can provide significant cost savings.
As long you meet the lender’s criteria (by having a good credit rating, employment history and sufficient earnings to repay the loan), you shouldn’t have any problems getting a loan.