How to Owner Finance a Car

How to Owner Finance a Car
••• a car in a car show image by Gary from <a href=''></a>

Any commercial transaction, including the sale of a car from one person to another, can be completed with owner financing. Owner financing--sometimes called seller financing--is when the seller of a given product extends credit to the buyer of that product and holds a promissory note for the loan. The opposite of owner financing is bank financing, where the seller receives payment in full from a bank and the borrower repays the lending institution. If you are going to owner finance your car there are some important documents you should use and some precautions you should take.

Run a credit check. If you&#039;re going to consider extending credit to another individual you should run a credit check on them. There are a variety of credit check services available and running a credit report on someone only costs a few dollars. You should also verify current employment with a recent paystub when investigating your potential borrower.

Document your transaction with a bill of sale. All purchases need a receipt for proof that the agreed-upon transaction took place. A bill of sale is just that: a commercial transaction receipt. The bill of sale for a car should document some specifics such as the make, model, VIN number, and mileage of the car.

Get a substantial down payment. If you&#039;re going to offer owner financing, be sure that you&#039;re getting a substantial down payment. Many banks won&#039;t extend auto loans without a 15 to 20 percent down payment. Consider asking for 25 percent or more because you should be taking on less risk than a bank would when offering seller financing. You should also charge higher interest rates than a bank would for a similar auto loan to compensate yourself for the risk you&#039;re taking on.

Execute a promissory note. A promissory note is a personal loan agreement; this is the document that spells out the interest charges and terms of the loan. If the borrower defaults on the promissory note this is also the document that can be used to bring suit against the debtor and demand payment on the loan.

Transfer the title. Once you&#039;ve completed the bill of sale and promissory note head to your local DMV and transfer the title of the car. The buyer will need to pay some taxes and fees to transfer the title. The seller will need to bring proof of a clean title to the DMV for the borrower to assume.


  • Most car shoppers seeking seller financing have poor credit and you should be wary of extending them a loan. The exception to this would be extending owner financing to a sophisticated buyer of unique cars that has exceptional credit history.