Legal Question in Credit and Debt Law in California

There is no way to guarantee payment. You can protect yourself to a degree by properly documenting the loan, and a security interest in the vehicle, but there are no guarantees that you will not end up being shorted on the deal. In fact, I will go one-step further and place the odds of you not being fully repaid at something well over 75% if the buyer is depending upon you financing the sale, and cannot qualify to go get their own financing. Financing the sale of a vehicle is a very bad idea.

If you are determined to do so, then you need a promissory note signed by the borrower, a loan agreement signed by the borrower and you, a security agreement signed by the borrower and you, you have some disclosures you are required to give and you need to be registered as the first lienholder with the DMV on the title to the vehicle. If you are the first lienholder, then the new certificate of title will come to you, and not to the buyer, upon the transfer, and you hold that just like a bank would until the loan is fully repaid. You need to obtain some legal counsel and have these documents drafted properly, or you could be put in a position of not being able to either collect your debt, or repossess the car if they default on the loan.

Finally, you need to determine if you are required to have a license or be registered with any federal or state agencies to make a loan of this type. There is new legislation which requires anyone arranging financing on a home purchase/sale to register with the federal and state government, and I am not sure if similar legislation exists for vehicle lending. Also be aware that if you are not a bank, there are limits on how much interest you may charge. In general, I think you will find that the risks far outweigh the benefits of making such a loan.

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