Purchasing a vehicle through a private seller can be a good way to save money on the purchase price of your next car.
However, if you are going to be using finance you may find that those savings are eroded by the reduction in finance options.
But why are there fewer options? Well, a buying a vehicle from a private seller is inherently more risky that through a licensed dealership.
And lenders do not like risk!
In this article, we will discuss what that risk is, the additional administrative work you will need to bear, and how this can cost you more in the long run.
Why Financing a Private Sale is Different
Lenders can be more tentative when financing a private vehicle sale due to the additional uncertainty of the quality of the underlying asset.
Licensed dealerships are required to uphold a number of consumer protections, and mechanical standards.
None of which are required of a private seller.
Not all lenders will support private sales
Some mainstream lenders will not lend on private sales at all. While plenty of non-bank lenders will, it could be treated as a higher risk loan.
This is due to the additional uncertainty around vehicle quality.
A lender of a secured car loan may be required to sell a vehicle to recover monies owed in the case of non-payment.
As a result, some lender may charge a private sale fee of between $50 and upwards of $600! Other may charge a slightly higher interest rate.
It all depends on the profile of the customer and the vehicle being purchased.
Lender Requirements for Private Vehicle Purchases
As part of a loan application a lender will also consider if the vehicle meets their criteria for acceptable loan collateral.
This can include things like vehicle age, total KMs, condition, and it’s market value.
So how would a lender assess the vehicle condition? Well, they use online software and you will have to upload photos.
These services also check some basics about the vehicle including the VIN number to ensure you know what you’re buying.
Conditional Loan Can Exclude Private Sales
We have previously obtained loan approvals for our customers that come with the condition that the vehicle must be purchased from a licenses dealership.
There are a number of factors that could lead to this outcome if you are buying the vehicle with finance.
So if you have your heart set on buying a vehicle from a private seller there may be some hiccups along the way unless you have excellent credit.
Why Finance is More Difficult
Lack of consumer protections
Dealerships are obligated to provide warranties, roadworthy certificates, registration, and a number of ongoing protections under Australian Consumer Law.
A dealership also has a vested interest in providing a good experience for their customers and building their brand reputation.
A private seller does not provide any of these protections and it is a buyer beware situation.
Once you buy the vehicle there will be no recourse if something major goes wrong.
Additional mechanical risk
Dealerships perform mechanical checks before selling and generally fix up any issues identified.
A private seller is unlikely to invest money into a vehicle they are about to sell and you may find that first trip to the mechanic uncovers some issues.
So anything you save on that purchase price could be offset very quickly, even for minor repairs.
Buyer is responsible for all checks
In a private sale, the onus is on you to confirm the vehicle’s history, condition, and if it is free of an encumbrance.
You should always check the Personal Property Securities Register (PPSR) to see if there is any existing security over the vehicle.
The search costs a few dollars and must be done before all sales.
In the same search you will also get information on the Written Off Vehicle Register (WOVR).
This tells you if the vehicle has previously been involved in a serious accident.
You also need to check that seller is the legal owner of the vehicle. This is easily overlooked, but can cause significant problems later if there is an issue.
As you can see there is a list of items that you just don’t need to worry about with a dealership.
Lender’s know this and must account to the possibility of a mistake being made.
Transfer of Ownership Documentation
Buying through a dealership is easy from the buyers point of view with all the paperwork generally handled by them.
When buying privately you will have to coordinate with the seller to ensure that everything is completed in a timely manner.
A lender will be able to provide guidance on what they need to settle the loan and pay the seller, and you will have to follow diligently.
Loan Application Process for Private Sales
The loan application does not really differ from any other car loan.
You still need to present your financials and demonstrate that you can repay the requested loan amount, and be subject to all the usual credit checks.
However, the difference is in the security being assessed for suitability.
There will be additional work required to satisfy the lender, which usually involves using software as directed by the lender to facilitate these checks.
For example, you may be required to provide:
- Make, model, and year
- VIN
- Seller’s ID
- PPSR checks done in platform
- Multiple photos of vehicle
These additional checks usually result in private sales loans taking longer to process than one from a dealership.
Sellers can often be sceptical of providing all their personal ID to a third party platform for the benefit of the buyer.
So don’t be surprised if they flat out refuse to do so.
Once conditional approval is obtained you will need to then show proof of the ownership transfer and any insurance that was required.
Only after all conditions have been met will the lender release the funds.
Most lenders will transfer the funds directly to the seller rather than releasing them to the buyer.
This ensures the loan proceeds are used for the intended purpose, controls fraud risk, and ensures all parties at protected.
Negotiating with a Private Seller When Using Finance
Financing can slow down the buying process enough for it to turn off some sellers.
They will always prefer a fast cash sale, but also know this is not always realistic given the high price tag that comes with most vehicles.
Some sellers may be very accommodating and happy to give you the time to get your finance in order.
Others may try and rush you, or just sell the car to someone else.
They have no obligation to you at the end of the day so you have to move fast to complete the sale as soon as you have agreed on price.
As a result, finance is not really a negotiating tool. More something where you need to minimise the potential disruption.
However, if you have a car loan pre-approval then this can be a powerful message to the seller that you are a serious buyer and are well advanced with your finance.
The seller may be tired of time wasters and happy to deal with someone committed, even if there is some extra admin work to get through.
Conclusion
Financing a car from a private seller may limit your loan options in some circumstances.
While you may be able to save a few dollars on the purchase price you may need to weigh this up against any additional lending costs you may incur.
We generally discourage private sales for this reason.
When you also factor in the uncertainty around vehicle quality, and the burden of paperwork you need to take on we find that the case for private sales is not strong.
But they have their place, and especially if you are searching for a specific vehicle.
There is almost always a way to finance these deals if you have the right broker if your corner.
If you have a tricky private sale to finance then get in touch with the team below and we will get to work.
