The good thing is, it works like regular car finance, except the vendor is a regular person and will be required to tick a few boxes before you drive off with your vehicle. So, whether you’re buying off Marketplace, Gumtree, Carsales or through a friend or loved one, here’s how it works.
Steps to finance a private car sale
1. Apply for pre-approval
A pre-approval can be a good idea because it gives you an indication as to how much you can actually get for a loan. It’s no use shopping for a Toyota Landcruiser when you can afford only a Corolla. Pre-approval is usually pretty straightforward and takes only a few minutes.
2. Find the right car
After you’ve been pre-approved, it’s time to go shopping. This includes trawling all the online listings to really narrow down the car you want, its trim level, colour and more.
You might have already gone window shopping, but you'll need to be a bit more laser-focused. You’ll also need to stick within the budget of your pre-approval, plus your deposit if have one.
Be aware that your lender will also have a few requirements as to the condition and age of the car if it’s a secured loan.
From here you will need to talk with the vendor, test drive it, and explain that you’re buying it with a car loan and the money will come from the bank or lender, not you per se.
3. Get unconditional approval and pay for the car
If you’ve gotten pre-approval, unconditional approval is usually not too much hassle provided everything - your financial information and car information - is still accurate.
The seller will need to provide the current registration certificate, their drivers licence, their banking details, any financier payout letter if the car is already encumbered, the vehicle inspection report and roadworthy, and the sale agreement between vendor and buyer.
Considerations with car loans for private sales
The lender might deem a used car via a private sale is more risk and charge a higher interest rate accordingly.
Age of the car
Many lenders will have restrictions as to how old the car can be. It is typically up to 5-7 years with the terminal age a maximum of 12 years. This means that at the start of the loan term, the car can be aged no older than 5-7 years, and by the end, 12 years. So, if you want an older car, you might only be able to choose shorter loan terms.
The car could already be financed
The person selling the car may not have paid off their loan. This means the vehicle is encumbered. This doesn’t stop the sale, but means there might be a couple more simple steps.
If the vendor can’t pay off the loan, they will need to provide a payout letter from their lender. This includes the balance owing, the due date of the payout letter, the lender’s bank details, and a statement from that lender they will lift the encumbrance on the car once full payment has been received.
If there is money owing, your lender and the vendor’s lender will liaise directly with one another.
To check if the vehicle has finance owing, plus if it's been written off, a PPSR check costs as little as $2.
Don’t forget insurance, pre-purchase inspection, registration and roadworthy
It might be a clause in your contract that for financing you need proof of comprehensive car insurance, a pre-purchase inspection, registration and roadworthy.
With insurers you can opt to take it out by a certain date, and not actually pay for it until the car is under your name.
If a vendor is unwilling to provide registration and roadworthy and you don't want to burden yourself with the process, it might not be legal to sell depending on your state, and it might be worth looking at other vehicles.