A private party loan — financing for car shoppers buying from a private owner — can be easier to qualify for than traditional loans. However, lenders may charge more because a private-party purchase is considered riskier than buying from a dealer.
What is a private party auto loan?
A private party auto loan lets you finance a vehicle sold by the owner, not a dealer.
“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 have higher interest 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
Your budget and the local availability of used cars will be the biggest factors to consider. Fortunately, the actual financing process is quite similar to shopping for a new or used car at a dealership.
Create a budget
To create your purchase budget, begin with your credit history and score. 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 calculate your monthly payment, decide how much you can pay out of pocket and determine how much you will need to finance.
Choose a vehicle
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.
You may also want to check the cost to own estimates from trusted sources, like Edmunds and Kelley Blue Book. These can help guide you toward a reliable car.
And don’t be discouraged if you don’t find the exact make, model and trim of your dreams. Private sales are naturally limited to local inventory, so you should have a few options in mind. You may be able to use a national website to find the right car but traveling for a test drive and purchase — and dealing with out-of-state title transfers — may be more trouble than the car is worth.
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.
Not every lender offers private party auto loans, so confirm that the one you are interested in does. Because private party loans are typically more expensive, it is critical to check rates and apply for preapproval before you start shopping. This way, you will have a strong idea of what you can spend — and what you can expect to pay each month.
Finalize the deal
After you sign the loan agreement, your lender will send a check either to you or directly to the seller. If you or the seller opt for direct deposit, make sure the seller knows that transferring funds can take a few days.
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 buying the car.
Your lender will provide you with payment due dates and an amortization schedule, which tells you how much money will go to interest and principal each month. If you can, opt for autopay. This is a great way to ensure you pay on time without sending a check or constantly logging in to an online portal. Just be sure to check that payments have gone through each month.
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:
- There are better vehicle deals: Sale prices from private sellers 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 sale 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. But like all loans offered to borrowers with bad credit, they come with higher interest rates and monthly payments as well as a higher overall cost.
Where to find private party auto loans
Not all lenders offer private party auto loans, but most large financial institutions — like community banks, local credit unions and online lenders — do have them.
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 100,000 miles in order to consider the buyer for a loan. This is common with any used car, whether you purchase it from a dealership or private seller.
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 will 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 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 can’t 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.
Compare personal loans
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. The vehicle won’t play a role in an approval decision.
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.
- 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.
Shop at a dealership
Dealers may have higher prices than private sellers, but it’s much simpler to get a loan. If you’ve been rejected for a private auto loan, see if you qualify for in-house financing offered by the dealer. You may also qualify for a used auto loan at a lender that previously rejected you for a private loan.
You will also have a different selection of vehicles. It may not be the ideal circumstance if you are really looking to go through a private sale, but it may be the more accessible option.
Build your savings
If you are not in a rush or haven’t found the right private sale yet, keep building your savings. The more you can put toward a car, the less money you will spend overall. And if you are looking at older, cheaper models that wouldn’t qualify for a traditional loan, you won’t need to take on extra risk by financing your car with a personal loan.
The bottom line
Private party auto loans are a quick, relatively pain free way to buy outside of the high-pressure environment of a dealership. They aren’t as common, but you will still be able to find competitive options from a variety of lenders. And since sale prices for private purchases are lower than those at a dealership, you may be able to save money.