Thanks for asking!
Like you, my very first automobile purchase was made possible with a
private loan, coincidentally in California. I'll be happy to explore
the basic legal and practical aspects of this process for you. The
fine print: answers offered by Google Answers and their Research
contractors are intended for informational purposes only, and should
not be mistaken for professional advice. That said, I'll endeavor to
give the most complete and correct information I can. Let's take the
questions one by one.
1) Do I have to be a licensed dealer to finance auto purchases?
No, you may offer to finance the sale of your car without a license.
There are a number of laws that apply to automobile financing by
licensed lenders (yes, California DOES license commercial lenders),
among them, the Automobile Sales Finance Act, the California
Commercial Code, and California's ursary laws (reference links listed
below). However, detailed study of the subject may be shortcut by
obtaining a contract template specifically tailored to meeting
California's contract requirements. Your financing arrangement would
be covered by a contract known as a Promissory Note.
State of California
Finance Lenders Law
http://www.corp.ca.gov/pub/lender.htm
Cardreport.com offers a helpful menu of California lending laws,
although the site itself can be visually annoying. I recommend turning
off images before clicking the links.
Cardreport.com
California Credit Laws
http://www.cardreport.com/laws/california/california-laws.html
Title IV - Loan
Chapter 3. Loan of Money
California Civil Code Section 1912-1916.12
http://www.cardreport.com/laws/california/1912-1916-12.html
State of California
California Commercial Code Table of Contents
http://www.leginfo.ca.gov/cgi-bin/calawquery?codesection=com&codebody=&hits=20
California Corporations Code Table of Contents
http://www.leginfo.ca.gov/cgi-bin/calawquery?codesection=corp&codebody=&hits=20
2) How can I avoid the obvious potential pitfalls?
You can minimize risk using the same analysis factors that commercial
lenders use to qualify loan applicants. There is little resource
information available online for the private lender, so let's look at
this aspect from a general consumer credit angle. The following
document, "What Qualifies You For Credit?" approaches the subject from
the lender's perspective. This document is offered in Word97 format,
which is readable via most word processors.
"Credit grantors gather information, primarily from your credit
application and a credit bureau report, to determine whether you will
be able and willing to repay your debt. Are you a good risk? In
other words, credit grantors want to know if you are creditworthy.
Creditworthiness is based on a number of things, often referred to as
the six “C’s” of credit.
The important thing to remember is that every credit application is
analyzed in relationship to these six “C’s.” This is true whether or
not a risk score is assigned. And this approach applies to
applications processed both manually and by automated systems.
The Six “C’s” of Credit
The intent of this analysis is to determine: 1) Will the borrower
pay? (character or credit reputation); 2) Can the borrower pay?
(capacity); 3) Does the borrower have enough cash on hand to pay if a
period of adversity arises? (capital); 4) Will something adversely
affect the borrower’s ability to pay? (conditions); 5) Will the credit
issuer be protected if the borrower fails to repay the loan?
(collateral); and 6) Does the borrower demonstrate an ability to make
wise decisions? (common sense)."
CBM Credit Education Foundation, Inc.
What Qualifies You For Credit?
http://www.cbmfoundation.org/files/4.doc
You may require a good deal of background information, including
personal references and credit references. Personal references may
assume a much greater importance in this type of loan. You'll have to
verify those references directly. When checking personal references,
make a list of questions about the applicant that will enable you to
gain an understanding of his/her reliability in monetary matters and
personal responsibility. The usual limiting factor would be to avoid
questions that are discriminatory, on the basis of race, gender, etc.
If I were doing this myself, I'd explain to the buyer that I required
personal references from people s/he'd known for a reasonable period
of time, who could attest to his/her reliability in financial matters,
and who could verify some aspect of his/her sense of responsibility as
demonstrated as an employee, a customer, or friend. Those used as
personal references have a greater degree of freedom to disclose
information about an individual.
Simply by offering a private loan, you may require an interest rate
that is higher than commercial loan sources, which reflects the higher
risk. You might also require that repayment be set up through an
automated monthly payment system. Check with your own bank, most are
happy to setup or administer this sort of arrangement for you. The
cost can be added into the sales price or passed along directly as a
loan service fee.
Since you don't have all of the credit checking resources available to
a commercial institution, it would be prudent to require copies of any
relevant financial documents to support and/or the information
supplied by the buyer. You can think of this as the "old fashioned"
loan, the standard of yesterday, before the full blossoming of
computerized records. Be sure to ask for identity verification
documents, including Social Security number.
Think about the consequences of delinquency or default. You'd have
legal remedies that can be undertaken by agents on your behalf
(repossession specialists), but you should probably decide in advance
if you willing to carry the process that far, if needed.
Consumer Information: Automobile Repossession (California)
http://www.weblocator.com/attorney/ca/law/c05.html#cac050500
Another potential pitfall is the tax implications of lending. It might
be wise to consult your tax advisor or preparer, so that you can best
evaluate the tax impact of this source of income.
Risk is inherent in this type of transaction. You can only minimize it
with prudent precautions, not avoid it completely.
3) What information should I get from the purchaser?
You should obtain the same information as any commercial lender. You
might obtain several credit application from commercial automobile
lenders for comparison. Individual credit application templates are
also available at most stationery or business supply stores. I'll link
sources below for online download of applications. You might also
create an additional form of your own which asks for detailed
information such as why the buyer is seeking private financing,
additional personal references, or even a detailed income/expense
listing. You'll also need a form which gives written permission for
you to obtain credit verification and other background information.
4) How can I do a credit check?
The simplest way? Use your computer. As part of the application
process, have the buyer use your system to obtain his own credit
report. This however, may raise privacy issues. You'd have to
negotiate with the buyer for a release of liability, and probably be
willing to take steps to isolate and remove the information entered by
the buyer, after the process is complete. Alternatively, you may
obtain credit reports through a credit reporting agency. You'll need a
signed release, as mentioned above in the Applications section.
Google Directory
Credit Reports
http://directory.google.com/Top/Business/Financial_Services/Credit_and_Collection/Credit_Reports/
5) Where can I get a sample financing contract on-line?
Here's a Promissory Note sample by GMAC for an automobile finance
contract. It shows the typical clauses and provisions of such a
contract, however, it's not specifically worded for California law.
Promissory Note Sample
http://contracts.corporate.findlaw.com/agreements/wwf/gmac.note.1997.12.12.html
You may obtain California documents, ready for use, from a number of
online legal template services. I've used several of these services
for my own business, notably when visiting an out-of-town prospects,
closing a sale unexpectedly, needing a competent contract, and not
having access to my usual attorney.
U.S. Legal Forms
http://www.uslegalforms.com/business_legal_form.htm
From the text menu, select the forms for Automotive Bill of Sale, or
Application (Credit). On the customization page, select CA as the
state. You'll be able to view .pdf samples before purchase.
Additional, similar sources:
JurisDocuments
Legal Forms for California and other states
http://www.humboldt1.com/~cbender/
Legal Law Forms
http://www.legallawforms.com/
Free, generic Business Forms are available from the 'Lectric Law
Library. Useful for comparison, these are really "use at your own
risk" forms which may not cover California provisions.
'Lectric Law Library
Business and General Forms
http://www.lectlaw.com/formb.htm
Sample Debt Collection Letters
http://www.iwantmymoney.com/samplelet.htm
Google search terms
"private lending"
California law automobile sales financing
private lending advice tips
consumer credit qualification
credit reporting agencies
legal forms
I hope these resources and this information is useful to you.
Hopefully, I've managed to demystify the lending process somewhat.
Should you have any questions about the material provided, please,
feel free to ask.
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