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Private party auto loan: What it is and how to find one

Car with a for sale by owner sign
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With many finance options available to make affording a vehicle possible, it’s important to understand the specifics of each choice. A private party loan — financing for those buying from a private owner — can be easier to qualify for than traditional loans.

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

To successfully secure the best private party auto loan there are a few steps you should follow.

Create a budget

The first step, as with most financial endeavors, begins with creating a budget. The key to understanding your budget is knowing your credit history and score before you even find a lender. By checking your credit you will have a strong idea of what interest rates and loan amounts you might qualify for. 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 and compare lenders 

After setting your budget, educate yourself on the type of vehicle you want. Know the type, age and mileage of the car you want before you approach a lender. This will factor into the type of loan you are eligible for. Once you know what vehicle you intend to purchase, shop around and look at a few prospective lenders to find the loan products that best suit your needs. Compare interest rates, loan terms, monthly payments, fees and penalties.

Finalize the deal

Once you find a private party auto loan that fits, qualify and sign the loan agreement, the lender will send a check, either to you or directly to the seller of the vehicle. The lender may even directly deposit the funds into your account. This can take a few days, so communicate that to the seller. 

The state the deal is occurring in determines what must be done to legally transfer ownership to you. This can be found on your state’s Department of Motor Vehicles website and should be reviewed ahead of sending the funds.

Start making payments

Now that you have agreed to the loan, organize your future payments. Many private party auto lenders provide the option to set up autopay or to make payments through an online portal. This is a great way to ensure you pay on time, so be sure to discuss your options with your lender to avoid missing payments.

4 reasons to consider a private party loan

While private party auto loans may charge higher rates than standard auto loans, there are some perks:

  1. 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.
  2. 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.
  3. 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.
  4. 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, monthly payments and a higher overall cost.

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. Carefully review the lender’s criteria before applying for a private party auto loan to avoid taking a hit to your credit for a loan that you don’t qualify for.

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 with basic personal details, including:

  • Your full name, birthdate, 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 car that will secure the loan. You should be able to find out what those requirements are before you apply.

If your credit isn’t 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 you did not receive approval, or cannot find a private party auto loan that fits the car you want to buy, there are still 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 will likely carry a higher interest rate than a private party auto loan and could end up costing you more overall.

The bottom line

Private party auto loans are a great option to finance a new vehicle. These loans can save you money because it is unsecured and less expensive and has much more flexibility than other loan options. Take the time to do your homework before signing off on a private loan to understand the pros and cons. 

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Written by
Carly Severino
Insurance Contributor
Carly Severino is a contributing insurance writer for Bankrate. With experience writing for Coverage.com, Reviews.com and TheSimpleDollar.com, she has covered a broad range of insurance products.
Edited by
Auto loans editor