When you're looking to buy a car, a dealership is usually the first place you go. However, you may find more reasonably priced vehicles from private sellers. If you can pay for it in cash, it's a done deal, but if you need to finance your purchase, your best bet is to apply for a private party auto loan — a financial product designed especially for those who want to purchase cars from a private seller. It's a solid option if you prefer shorter loan repayment terms (less than 24 months) or have a less-than-ideal credit score.
A private party auto loan is a secured loan that can provide the necessary funds to purchase a car from a private seller.
You can apply for a private party auto loan with banks, credit unions and online lenders. However, it's not as widely available as a traditional auto loan.
A private party auto loan is your best financing option for a used car from a private seller. Although you can consider a personal loan, you'll find lower interest rates with the former.
What Is a Private Party Auto Loan?
If you're wondering what a private party auto loan is, it's a car loan that allows you to borrow from a lender to purchase a car from a private seller.
In October 2022, Kelley Blue Book put the average price of a used car at $27,564. While more affordable than a brand-new vehicle, purchasing one from a private seller can increase your savings. However, unlike dealerships, they don't offer in-house financing — a private party auto loan solves that problem for you.
It’s also your best bet if you don't have the best credit score. You can still get this auto loan with bad credit, but you’ll likely have a higher APR. Your other option is to take out a personal loan. However, you're still more likely to find lower rates with a private party auto loan, even with a low credit score.
However, there are also certain drawbacks to securing this kind of auto loan. They aren't as widely available as traditional ones because not all lenders offer them. Or, if they do, they may come with a higher APR. For example, the APR for a private party loan could be more than 2% more than a used car auto loan from the same lender.
The car you purchase also serves as collateral since this loan is secured. So if you fail to keep up with your loan obligations, the lender can seize your vehicle.
How Does a Private Party Auto Loan Work?
How a private party auto loan works isn't that different from a traditional one. However, some things true for a standard auto loan don’t apply to one for private car purchases, and vice versa. Understanding the similarities and differences is essential so that nothing falls through the cracks.
Here are some items to consider to understand the ins and outs of a private party auto loan:
- Collateral requirements: A private party auto loan is a secured loan, which means collateral is necessary. However, you don't need to put up an asset when you apply — the car you intend to purchase becomes the collateral. If you don't make the monthly payments, your lender can and will seize your vehicle.
- Loan terms: You'll be hard-pressed to find a traditional auto loan with repayment terms shorter than 24 months. However, loan terms for private party auto loans can range from 12 to 84 months. Going for a shorter timeline allows you to save on interest.
- Average rates and costs: You're more likely to get a higher APR for private party auto loans than a dealership's used-car loan. Lenders view purchases from individuals as riskier than those from a dealership. Dealerships also sometimes offer warranties and certifications that private sellers don't.
- Eligibility requirements: Like a traditional auto loan, lenders offering private party auto loans also consider your credit score and income. However, they also look at other things, such as a vehicle's age and mileage. Eligibility requirements may vary between lenders, so it's best to check specifics with them.
- APR Calculation: Your APR will depend on several factors. Lenders consider your credit history and preferred loan terms, similar to a standard auto loan. However, for private party auto loans, the vehicle's mileage and age may affect the APR, too.
- Application process: It might be easier to qualify for a private party auto loan than a traditional one despite the higher rates and associated costs, making it an excellent option for borrowers with poor credit standings. However, it might take longer to fund since lenders are more likely to ask for more information about the car you want to buy. These include its value or whether the owner still owes money on their auto loan.
It's best to take extra precautions when buying a car from a private seller. After all, unless you're acquainted, the seller is virtually a stranger. More than that, the vehicle has already been used. Here are some things to keep in mind to cover all your bases:
- Contact multiple sellers. Don't go with the first one, even if the seller already has your preferred vehicle. Shop around — you'll never know what others are offering.
- Ask the seller for the vehicle's mileage, service records and registration papers.
- Using the information you have, do your own research. Check the vehicle's market value on Kelley Blue Book.
- Ensure you do a test drive — you must see how the car performs on the road.
- Bring a mechanic with you. The mechanic’s expertise can help you spot potential issues that you might otherwise gloss over.
Where to Get a Private Party Auto Loan
Although private party auto loans aren't as widely available as their traditional counterparts, several financial institutions offer them. You can find private party auto loans from the following:
Several large banks, such as Bank of America and PNC Bank, offer private party auto loans. However, others, like Capital One, Chase and Wells Fargo, offer loans through a dealership.
You can also find potential lenders from credit unions. First Credit Union and Credit Union West are prime examples. However, don't forget that you must first become a member to borrow from a credit union.
A convenient way to get a private party auto loan is through an online lender because you can complete the entire application process in the comfort of your home. Consider MyAutoLoan.com and LightStream if you prefer this method.
If you still can't find a lender after checking your options, you may have to consider ways to finance your purchase, such as personal loans. However, since these are unsecured loans, your credit history and income may affect your chances significantly. You're also likely to get higher APRs.
How to Qualify for a Private Party Auto Loan
Typically, qualifying for a private party auto loan is less challenging than a traditional one. However, lenders look at several things before determining your eligibility.
- Credit score and credit history: Lenders may not require an excellent credit score, but it would be best to have a FICO score of at least 640. A better credit score indicates you can manage your debt well, resulting in more competitive rates.
- Income requirements: Lenders need assurance you can repay your loan, and proof of income is one way of doing that. However, the actual amount required varies between lenders.
- DTI ratio: Debt-to-income ratio indicates how much of your income goes into debt repayment. As your ratio increases, so does your risk level as a borrower.
- Type of vehicle: Lenders typically look at the vehicle's age and mileage. If it's clocked too many miles on its odometer or is too old, you may have challenges getting your loan approved.
Remember that these are general guidelines. Lenders typically have varying requirements, so it's best to check with them for specifics.
5 Steps to Getting a Private Party Auto Loan
Knowing what to expect is essential if you decide a private party auto loan is your best option. This way, you'll be ready for the required legwork as you undergo the application process. Here are the five steps to securing your loan.
Check your eligibility
Ensure you qualify for the loan before anything else. Although lenders may have different eligibility requirements, they have several in common, such as credit score and income. If your credit standing isn't the best and you don't need to purchase the car immediately, you might want to consider improving your credit score before pursuing a loan application.
Look for a reputable lender
Dealers typically take care of finding financing options for their customers. Since you're transacting with the vehicle's owner, you won't have access to that assistance, so you'll have to do your own research. Although not all lenders offer private party auto loans, you can find one from banks, credit unions or online lenders.
Get pre-approved for a loan
Some banks will ask for details about the car you want to buy, such as its age, make, model and mileage. However, others can pre-approve you based on your initial information. Knowing an estimate of how much you can borrow allows you to determine what kind of car you can purchase and whether or not the monthly payments are manageable.
Compare loan offers
Don't go with the first lender you come across, no matter how attractive the offer is. Shopping around and gathering loan offers is a sure way to get the best deal. Remember, lenders may offer different APRs for identical loan terms and amounts. Don't forget to compare fees and penalties, too.
Finalize the loan
You can sign the dotted line when you find a loan offer that allows you to purchase your car while keeping your financial obligations manageable. Prepare the required documents your lender may request — don't dillydally on this. Your lender won't be able to disburse your funds if you delay.
When taking out a private party auto loan, prepare to submit the following documents:
- Proof of income and employment
- Current debt obligations (e.g., mortgage or other existing loans)
- The car’s make and model, model year and mileage
- The vehicle identification number (VIN)
- Bill of sale detailing the agreements between you and the seller, including the purchase price
- A copy of the vehicle's registration papers and title certificate
- A written payoff quote from the seller’s lender (only if applicable
- A written document from the previous lender (if the current owner has an outstanding loan balance on the car)
FAQs About Private Party Auto Loans
Taking out a private party auto loan may seem daunting, particularly if you're unfamiliar with the process. However, it might be your best loan option for a private party purchase.
The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.
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