Selling a car through private financing can feel uncertain, especially when the buyer plans to pay over time. A car promissory note provides peace of mind by clearly outlining the payment schedule, interest rates, and consequences for missed payments. In this guide, we’ll explain how it works, what to include, and how to make your car sale legally secure.
What Is a Promissory Note for a Car?
A promissory note for a car loan is a written promise by a buyer to pay the seller a specific amount of money for a vehicle. The buyer can either pay in full by a specified date or through a series of scheduled payments. It’s most often used in private car sales when the buyer doesn’t have the funds up front.
This agreement is legally enforceable under the Uniform Commercial Code (UCC) § 3-104, which defines it as a negotiable instrument. This is essentially a legally binding agreement that can be enforced in court if the buyer fails to make payment.
A car promissory note differs from a standard auto loan because it’s created directly between a private seller and a buyer, not through a bank or dealership. The seller can:
- Set a custom payment schedule that fits the buyer’s ability to pay
- Charge interest, following state usury laws
- Decide whether to secure the note with the car as collateral (which means the seller can take it back if the buyer stops paying)
Who Needs a Promissory Note for a Car
You can use a promissory note for a car to allow the buyer to pay over time, rather than requiring them to pay the full price up front. It’s most commonly used in:
- Private car sales, where the buyer pays in monthly or scheduled installments
- Small car dealerships or auctions, where short-term payment plans are offered directly to buyers
- Sales between family or friends, to document terms and avoid misunderstandings
This document helps both parties by clearly outlining the entire agreement, including the amount owed, due date, and the consequences of late payments.
Benefits and Risks of Using a Car Promissory Note
If you’re selling a car and letting the buyer pay over time, a promissory note can offer both advantages and drawbacks.
Benefits
- Payment Protection: A promissory note is a legally binding document confirming the buyer’s agreement to pay. It provides a written record of the debt and the repayment plan.
- Clear Legal Recourse: If the buyer fails to pay, the seller can rely on the promissory note to pursue legal action or reclaim the vehicle (if secured).
- Custom Payment Terms: Sellers can choose the interest rate, payment schedule, late fees, and due dates. This flexibility allows them to set terms that work for both parties.
- More Potential Buyers: Allowing installment payments can attract buyers who might otherwise be unable to afford the car.
- Simple and Affordable: Unlike third-party loans, promissory notes are straightforward to create and don’t require lender approval.
- Earn Interest: Sellers can charge interest on the loan, which allows them to earn some extra money over time.
Risks
- Buyer May Stop Paying: If the buyer defaults, it can be challenging to recover the money, especially if they live in another state.
- Enforcement Can Be Complex: Legal action may take time and require proof that the note meets all legal requirements.
- Secured Notes May Require Extra Paperwork: If the car is used as collateral, you might need to file a lien or UCC-1 financing statement with your state’s DMV or local agency to make the agreement enforceable (UCC § 9-310).
Can You Sell a Car Promissory Note?
Yes, in many cases, you can sell your promissory note to someone else. This means a third party would take over collecting the payments from the buyer. The note’s value depends on factors such as the amount still owed, the buyer’s payment history, and the interest rate. For more information, refer to Legal Templates’s guide on selling a promissory note.
Car Promissory Note vs. Vehicle Bill of Sale
If you’re selling a car and the buyer is paying over time, you’ll need both a promissory note and a vehicle bill of sale. Although these documents serve different purposes, they offer stronger legal protection and clarity together.
While a promissory note outlines how and when the car will be paid for, a vehicle bill of sale records the change in ownership. Keep both documents together in your records so you have legal backing for both the sale and repayment.
Below is a comparison to help you see how they differ:
| Feature | Car Promissory Note | Vehicle Bill of Sale |
|---|---|---|
| Purpose | Outlines the loan terms for car payments over time | Proves ownership transfer and that a sale has happened |
| Payment Type | Can be paid in installments or at a specific time | Usually shows a one-time full payment |
| Legally Enforceable | Yes, it's a debt agreement that is enforceable in court | Yes, it serves as written evidence of the sale |
| Includes Payment Terms | Includes payment schedule, interest, and penalties | Shows the total price, vehicle details (make, model, VIN, etc.), and the names of both parties. |
| Required by Law | Not always needed, but can be important if the seller is financing | Many states require a bill of sale to register the vehicle or transfer title |
| When to Use | When the seller finances the sale and the buyer repays over time | In all vehicle sales to record the transaction |
Secured vs. Unsecured Car Promissory Notes
When creating a promissory note for a car sale, the agreement can either be secured or unsecured. The key difference lies in how the seller is protected if the buyer stops making payments.
- Secured Promissory Note: With a secured promissory note, the vehicle itself is used as collateral. The seller keeps a lien on the title until the buyer pays off the loan. If the buyer fails to make payment, the seller may legally repossess the car. Most sellers prefer a secured note to reduce their risk.
- Unsecured Promissory Note: An unsecured promissory note relies solely on the buyer’s promise to pay. The seller may still sue for payment, but they cannot automatically reclaim the car. Promissory notes often have higher interest rates to account for the risk of nonpayment.
Car Repossession Rules
Even with a secured note, many states require written notice or a court order before you can legally reclaim the car after the buyer stops making payments. Always check your state’s DMV or repossession laws before acting.
How to Write a Car Promissory Note
A well-written car promissory note for a car loan should include precise details about the car, payment terms, and the responsibilities of each party. Here are some key sections to include when writing a promissory note for a car.
Buyer and Seller Information
Start by listing the full legal names, mailing addresses, and contact details of the vehicle’s buyer and seller. This information identifies who is entering into the agreement and helps avoid confusion later.
Vehicle Information
Describe the vehicle being sold in detail. Include the year, make, model, and vehicle identification number (VIN). In most states, you are also required to provide an odometer disclosure, which records the car’s mileage at the time of sale (49 USC § 32705, 49 CFR Part 580). You can also include the license plate number for extra clarity.
Purchase Price and Payment Terms
Write the total purchase price and note how much, if any, the buyer will pay up front as a down payment. The remaining balance is the principal amount, which is the sum the buyer still owes. The promissory note should clearly outline how and when payments will be made, including:
- Payment frequency, such as monthly or biweekly, and the total term of the loan
- Payment due dates, including the final payment date, when the balance will be paid in full
- The amount of each payment
- The interest rate, if one applies
Listing these details in writing creates a clear record if payment disputes arise later.
Late Fees and Penalties
It’s important to decide what happens if the buyer misses a payment. Clearly specifying late fees and penalties shows both parties how to handle late or missed payments reasonably.
In the promissory note, specify:
- What counts as a late payment, such as more than five days after the due date
- Whether there is a grace period before charging a fee
- The late fee amount or percentage
Most sellers charge a small flat fee or a percentage of the overdue amount. Keeping this reasonable makes the note fair and more likely to hold up in court if payment issues arise.
A clear late-fee clause keeps both parties accountable and helps avoid confusion if payments are missed.
Security and Collateral
If the note is secured, specify that the vehicle serves as collateral until the loan is fully paid. Include the car’s details and a statement that failure to pay may result in repossession, in accordance with state law.
Default and Remedies
If the buyer defaults (misses a payment or violates terms), the note should explain how the seller may respond, such as sending a written notice, charging late fees, or taking legal action if the issue isn’t resolved.
Signature and Dates
A car promissory note becomes legally binding once both the buyer and seller have signed and dated it. Each person should keep a signed copy for their records. Having signatures and dates in place helps confirm the identities of both parties.
Notarization and Witnesses
Notarization isn’t required in most states, but it adds credibility and helps confirm that both parties signed the vehicle promissory note willingly. For high-value sales or when the car is used as collateral, having the document notarized or witnessed provides extra legal protection. If you plan to notarize your car promissory note, you can use our free notary acknowledgment form to record the notary’s verification.
What Happens if the Buyer Stops Paying?
If a buyer stops making payments, you have several options for responding, depending on the situation.
Communicate and Negotiate
Reach out to the buyer to confirm they understand they’ve missed a payment. Offer a short grace period or create a new written payment plan if both sides agree. It can be helpful to keep a record of communication in case legal action becomes necessary.
Demand Letter
If the buyer continues to miss payments, you can send a demand letter. This written notice formally reminds the buyer that they’re in default and explains what they must do to fix or “cure” the default.
Your demand letter should include:
- The amount owed, including late fees or penalties
- A deadline to pay (commonly 10-30 days)
- A copy of the original promissory note for reference
This letter proves that you gave the buyer a fair opportunity to resolve the issue before pursuing legal remedies.
Repossession (If the Note is Secured)
If the car is used as collateral, you may have the right to repossess it in the event of default. Note that repossession must be peaceful and follow state laws. Some states also require advance written notice or a court order before repossessing a vehicle.
Filing a Lawsuit
If the buyer doesn’t pay, you can file a claim in small claims court (for smaller debts) or civil court for larger amounts. Court limits vary by state, so be sure to check your state court website for specific rules.
Reporting Default to Credit Bureaus
If you’re a business or already have a reporting agreement with credit agencies, you can report the default to major bureaus such as TransUnion, Equifax, or Experian.
Private sellers usually can’t report missed payments directly to credit bureaus under 15 US Code § 1681s-2. However, you can still keep a record of the buyers’ missed payments in case you need to show proof in court.
Statute of Limitations
Each state sets a time limit for filing a lawsuit over an unpaid promissory note. The UCC sets a general six-year limit to enforce a note payable at a definite time (UCC § 3-118). Be sure to check your state’s specific rule through the official state law database or your local court website. For example, Massachusetts General Law, Ch. 260, Sec. 2, sets a six-year limit on most contract claims.
Other Ways to Finance a Car Sale
A car promissory note isn’t the only way to arrange a payment for a vehicle. Here are a few other options:
Lease-to-Own Agreement
A lease-to-own agreement is a legal agreement letting someone use an automobile for a specified period of time in exchange for payment. After the lease ends, they have the option to buy the car. This setup can help buyers who need time to build credit or save for the full amount.
Third-Party Financing
In this option, the buyer works with a bank, credit union, or online lender to get a loan. As the seller, you receive the full payment upfront, and the buyer makes payments to the lender, not to you. This method shifts the risk to the financial institution, but it can take longer to set up.
Dealer Financing
Some car dealers allow buyers to make payments directly to them, rather than going through a bank. Later, the dealer might work with a bank to manage the loan. This option can make buying a car easier for the buyer, but it typically comes with higher interest rates or additional fees.
Trade-In
A trade-in lets a buyer offer their old car as part of the payment for the new one. The trade-in value is subtracted from the total price. This can expedite the sale, but may result in lower overall earnings compared to a sale of cash or a promissory note.
Escrow Service
An escrow service acts as a neutral third party. It holds the money and car title until both sides meet all the conditions of the sale. This protects both parties but may involve extra service fees.
Layaway Plan
In a layaway arrangement, the buyer pays in installments over time but doesn’t receive the car until the full amount is paid. This gives you more protection as the seller, but delays the buyer’s use of the vehicle.
Each of these options has different costs, risks, and levels of control. For most private car sales, a vehicle promissory note is the simplest way to set clear payment terms, charge interest if desired, and maintain legal protection for both sides.
The Bottom Line
A car promissory note for a car loan offers a clear, legally enforceable way to sell a car when the buyer can’t pay up front. It protects the seller by outlining exact payment terms and provides the buyer with a fair and transparent repayment plan.
When written correctly, it serves as legal proof of the transaction and helps prevent future disputes. Whether you’re selling to a friend, family member, or a private buyer, having the terms in writing gives both parties peace of mind and confidence in the sale.
