What is a private party auto loan?
A private party auto loan lets you finance a vehicle you’re buying from a private owner.
“Millions of private party vehicle sales happen every year, typically at lower transaction prices than what would normally occur through a dealership,” says Strati Papageorge, senior vice president of auto product management for PNC Bank.
“These vehicles are typically older and higher mileage, and offering financing to consumers looking to purchase such vehicles gives them flexibility and options they otherwise might not have.”
Private party auto loans come with some disadvantages, though. For example, they’re not as widely available as loans for new vehicle purchases. And often, they charge higher rates.
“Because of the nature of private party sales, rates tend to be higher than you would see if you went to a dealership,” Papageorge says. “But the trade-off for customers is generally a lower vehicle price, so they can still have an affordable payment.”
There are ways to mitigate the drawbacks associated with private party auto loans and to find a lender that will offer an auto loan you can afford.
How a private party auto loan works
Here are some simple steps you should follow to secure the best private party auto loan:
- Check your credit: Knowing your credit score and credit history before finding a lender will give you a better idea of what interest rates and loan amounts you might qualify for.
- Budget accordingly: Once you know the state of your credit, it will be easier to come up with a budget and decide how much you can pay out of pocket and how much you will need to finance.
- Choose a vehicle: Before you approach a private party auto lender, be sure you know the type, age and mileage of the car you want. This will factor into the type of loan you are eligible for.
- Get loan quotes: In order to secure the best loan, you’ll need to get quotes from a few prospective lenders. Shop around to find the loan products that best suit your needs. Compare interest rates, loan terms, monthly payments, fees and penalties.
- Loan finalization: Once you’ve found the best private party auto loan for you, the lender will send a check, either to you or directly to the seller of the vehicle. The lender may even direct deposit the funds into your account. This may take a few days, so be sure to communicate that to the private seller.
- Transfer of vehicle ownership: This step largely depends on the state in which you are transacting with a private seller. Check with your state’s Department of Motor Vehicles to find out what you must do to transfer ownership to you.
- Payment schedule: Many private party auto lenders provide the option to set up autopay or to make payments through an online portal. Discuss your options with your lender to avoid missing payments.
Why to consider a private party loan
While private party auto loans may charge higher rates than standard auto loans, there are some perks:
- There are better vehicle deals: Sale prices from private lien holders tend to be lower than they are at auto dealerships. With a private party auto loan, you get the benefit of financing like you would at a dealership, plus the savings a private seller is likely to offer.
- It may be cheaper than a personal loan: A personal loan is likely to be more expensive because it’s unsecured. A lender assumes more risk when there is no collateral to back the loan if the borrower defaults.
- They offer flexibility: Rather than being limited to what a dealership offers, you can get the vehicle you want at a price you can afford from a private owner.
- There are loan options for bad credit: Even those with poor credit could be eligible to get private party auto loans. However, as with all loans offered to borrowers with bad credit, they come with higher interest rates, and therefore, have higher monthly payments.
Where to find private party auto loans
Loan products vary from one financial institution to another, so not all lenders carry private party auto loans. But you can get a private party auto loan through most large financial institutions, community banks, local credit unions and online lenders.
Some lenders may require the vehicle to meet certain criteria. For instance, they may require the car to be under 10 years old with fewer than 120,000 miles in order to consider the buyer for a loan.
Other lenders may have a minimum loan amount. If the vehicle you want is $6,000, but the lender doesn’t offer loans that small, you’ll have to find another lender.
Be sure to carefully review the lender’s criteria before applying for a private party auto loan.
How to apply for a private party auto loan
After you find the vehicle you want to buy from a private owner, be prepared to provide a lender basic personal details, including:
- Your full name, birth date, address, Social Security number and contact information
- Employment and income information.
- Current debt obligations, such as a mortgage.
You should also have ready certain documents and details about the vehicle you want to buy, including:
- Make and model, model year and mileage.
- The vehicle identification number, or VIN.
- Bill of sale that details the purchase agreement.
- Copy of the vehicle registration.
- Copy of the vehicle title.
- A written payoff quote from the seller’s lender, if applicable.
Lenders have different requirements for the borrower and the auto that will secure the loan. You should be able to find out what those requirements are before you apply.
If your credit isn’t very good, consider holding off on the purchase until you improve your credit score. Waiting a few months won’t transform your credit from poor to perfect, but it can make enough of a difference to earn you some savings on the interest rate and monthly payments.
Alternatives to private party auto loans
If your credit isn’t good enough or the vehicle you selected doesn’t meet the lender’s criteria, there are alternatives you can pursue to buy through a private seller.
The best alternative to a private party auto loan would be a personal loan. With unsecured personal loans, the lender considers your income and credit score to determine loan eligibility.
This may be a good option if:
- The vehicle you want to buy is too old or has too many miles on it.
- The vehicle is being purchased with a salvage title. A salvage title is issued when a vehicle has previously been declared a “total loss” because of heavy damage.
- The minimum loan amount is more than you want to borrow.
While a personal loan can give you the opportunity to purchase the vehicle you want, it likely will carry a higher interest rate than a private party auto loan and could end up costing you more overall.