Whether you're buying or selling a used car, you need to make sure to file all the paperwork and close the deal properly. While the laws governing the sale of motor vehicles vary from state to state, the general outline of the deal is similar. For the specific steps, make sure you check with the Department of Motor Vehicles in your state.

As a seller, you will need to make sure you receive the proper payment for your car and limit your liability (in case the new owner crashes the car right after driving away in it). Below, we take a look at the sales transaction from both sides: the seller and the buyer.

As a buyer, you will have to prove you are the new legal owner of the car in order to register it. In most cases, this means you will have to get the title (often called the "pink slip") from the seller or possibly a bill of sale. With the proper documents in hand, go to your state's DMV or motor vehicle registry, where you may be required to pay sales tax before you receive the new registration, title and (in some states) new license plates

It's your responsibility to make sure all the paperwork is filed correctly when you buy or sell a used car from a private-party seller.

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When You Sell Your Car

Getting payment: Cold, hard cash is the easiest way to collect payment for a used car. The buyer might request a receipt for the cash. If you provide a bill of sale, this will serve as a receipt. When cars are sold for amounts over $2,000, a cashier's check is recommended. When cars are being sold remotely, you can use an escrow service to facilitate the transaction. The escrow service essentially verifies that the funds are paid and transfers them from the buyer to the seller.

It's unwise to accept a promise of future payment from a buyer, even if it is someone you know. If the car is wrecked, the new owner's motivation to pay you back plummets. You are well within your rights to refuse to float loan payments, and in most cases the buyer will understand and quietly back down.

Limiting your liability: What if someone drives away in the car you just sold and gets into an accident? Can you be held responsible? There are two ways to deal with this concern. First, record the odometer reading, and sign the car's title over to the buyer. Second, in most states, a release-of-liability form can be downloaded from the registry of motor vehicles website. This story has links to the different Departments of Motor Vehicles.

Managing complications: What if the buyer calls the next day and wants you to take the car back? Or what if the buyer claims you didn't reveal something about the car or that a mechanical problem has been discovered?

Both buyer and seller should keep in mind that most states assume a used car is being sold "as is." That means there are no promises or guarantees after the sale is concluded. If you are a buyer, it's imperative you thoroughly inspect the car before purchase. Sellers can head off trouble by encouraging buyers to have an inspection.

Car Seller's Checklist

  • Have a smog test performed (if required in your state).
  • Fill out a release-of-liability form, including current mileage, and file it with the DMV.
  • Provide maintenance records (if available) to the new owner.
  • Receive payment in cash, by cashier's check or, if selling remotely, through an escrow service.
  • Take the license plates off the car (if required by your state).
  • Remove personal items from the glove compartment and other storage areas.
  • Hand over both sets of keys to the new owner, along with any warranty papers for the car, the battery, tires, etc.
  • Cancel insurance for the car.

When You Buy a Car

If you buy a used car from a dealership, the dealer will handle all the paperwork and register the car for you. In private-party sales, the seller and buyer handle the paperwork themselves. While there are many small steps to closing a used-car sale, the big picture is this: You as the buyer need to obtain proof that you purchased the car legally and get a statement of what you paid for it.

Where to do the transaction: Since you will be handling payment for the car, a bank's lobby makes a nice neutral meeting place. Often, you can also ask bank workers to make photocopies of the documents if necessary.

If there is a lien on the car: In some cases, the car you are buying might have a lien on it. That means the bank or lender is in possession of the title. Banks often handle this kind of used-vehicle sale, so check with the bank to learn exactly how to proceed. Essentially, the seller will need to make sure to pay off the balance of the loan before the car is transferred to you as the buyer. This process might take some time and delay the sale.

One way to deal with this situation is to conclude the sale at the bank that holds the title. The seller can call ahead and ask the bank to have the title ready. Then, when the seller has paid off the balance of the loan, he or she can sign the title over to you.

Beware of Fraud
Buyers need to be particularly cautious when buying a car sight unseen from an online auction. That process is more complicated, and you could be the target of scammers.

Car Buyer's Checklist

  • Get a smog test from the seller (if required by your state).
  • Make sure the registration is current. Otherwise, you could be held responsible for late fees.
  • Ask the seller to sign the title and record all the information, such as odometer readings, properly. (In some states you might need a transfer-of-ownership document, which is attached to the title.)
  • Have the seller fill out a bill of sale if required in your state. You can show this to the police if you are stopped right after the sale.
  • Pay state sales tax when the car is registered.
  • Activate or update your insurance policy.

Wrapping It Up

Private-party buying and selling involves some trust, but it goes most smoothly when you are well acquainted with the laws and common practices governing the process. Take the time to read and follow our checklists and let them guide you safely and quickly through the transaction.