Private-Party Auto Loans: What Are They And How Do They Work?
Miranda Crace6-minute read
UPDATED: July 26, 2023
If you buy a car at a dealership, you have a wide range of purchasing options. These include using the manufacturer’s financial services, getting an auto loan from your own bank and paying in cash. But what happens when you want to finance the purchase of a car from a private seller? In that case, your options are more limited – but you could use a private-party car loan.
Let’s examine private-party auto loans in detail, looking carefully at how they work and when it makes sense to use one.
What Is A Private-Party Auto Loan?
A private-party auto loan, or private-seller auto loan, is a form of financing used to purchase a car from an individual instead of a dealership. This type of auto loan isn’t widely available, but some national banks, online lenders and local banks or credit unions offer this service.
Like a traditional car loan, a private-party auto loan is secured, meaning the lender uses the vehicle you’re purchasing as collateral. In other words, your car could be repossessed if you default on the car loan.
How Does A Private-Party Car Loan Work?
The process of using an auto loan for a private-party sale is different from purchasing a vehicle from a dealership. Since you’ll be working without a salesperson, you’ll have to do some extra work to ensure the transaction goes smoothly.
Depending on your lender, you’ll most likely use the following steps to complete the sale:
1. Calculate your budget. Before you start looking for the perfect car, you need to determine how much you want to spend. Figuring out your budget ahead of time will help you find an auto loan that fits your needs without emptying your wallet.
2. Shop for a vehicle. With your budget in place, you’re ready to start looking at vehicles. You can shop online marketplaces or check out local listings.
3. Choose a lender. Once you’ve picked a vehicle, you can find a lender. This step may take some time because not all lenders offer private-party car loans. However, you should try to find a few options to compare against each other.
4. Apply for a loan. With a lender chosen, you can begin the application process. You’ll have to provide personal information and financial documents like pay stubs, bank statements and tax returns.
5. Submit the vehicle’s documentation. If you’re initially approved for the loan, your lender will require specific information about the vehicle you want to purchase. They’ll need to know its make, model, year, mileage, VIN and whether the seller holds the title.
6. Finalize the loan. After your lender receives the vehicle information, they can start finalizing the loan. They may also help you fill out the ownership transfer paperwork required for your state.
7. Purchase the vehicle. When your lender has completed the loan, you’ll receive your funds to purchase the vehicle. Or, your lender may send the money directly to the seller. From there, you can claim your vehicle and the seller can send the title to your lender.
Again, this process may vary among lenders. For example, not all lenders will help you with the ownership transfer paperwork. Make sure you understand your responsibilities in the transaction by speaking with your lender before applying.
The Pros And Cons Of Using A Private-Seller Auto Loan
While a private-party auto loan can help you buy the car you’ve perhaps always wanted, this type of financing can also come with some drawbacks. To determine if a private-seller car loan is right for you, carefully consider both its pros and cons.
You can enjoy the following advantages with a private-party auto loan:
- You can avoid dealership fees.
- You could finance the purchase of a rare vehicle owned by a private collector.
- You won’t have to dip into your savings account to fund the entire purchase.
Unfortunately, you may also experience these disadvantages:
- It can be hard to find a lender offering this loan product.
- Private seller car loans may come with a higher interest rate or annual percentage rate (APR).
- The application process can take longer than a standard car loan.
- You may have more restrictive loan terms.
- Some lenders may not finance a vehicle that’s too old, has too many miles or has a salvage title.
- Your lender may require a down payment or charge an origination fee.
When Do Private-Party Car Loans Make Sense?
If you’re still unsure whether a private-seller auto loan is right for you after weighing the pros and cons, consider asking yourself the following questions:
- Is the used car I want to buy available from a dealership? If your desired vehicle is rare or not available through a dealership, buying from a private seller may be your only choice.
- Is the car available through a dealership but I can’t afford it? Maybe you’ve found the car you want through a dealership, but you couldn’t negotiate a fair price. A private seller may accept a lower price for the same vehicle if you use a private-party car loan.
Simply put, a private-party auto loan works best when you’ll save money going with an individual seller rather than a dealership. However, you should compare the costs between options to confirm you’ll be saving money. If a private-party auto loan isn’t going to result in money savings, it may be easier to work with a dealership that can help you find financing and fill out the transfer paperwork for you.
Private-Party Car Loan Alternatives
If a private-party car loan doesn’t work for you, you thankfully have the option to consider some excellent alternatives.
Using a personal loan is a fantastic way to finance the purchase of a vehicle without using a car loan. Most personal loans are unsecured, which means the vehicle you buy won’t be used as collateral. You also won’t have to worry about a down payment if your loan allows you to finance the entire purchase.
While personal loans are a great alternative, they do carry strict income and credit score requirements. So, if you have a low credit score or a high debt-to-income ratio (DTI), your interest rate may be high.
Home Equity Loans
If you own a home, another alternative to perhaps consider is a home equity loan. A second mortgage that uses the equity in your home as collateral, this type of loan can come with a higher loan amount and a longer repayment term.
Unfortunately, since your home serves as collateral for the loan, the lender can foreclose on your house if you fail to make your monthly payments. This requirement can make using a home equity loan riskier than using an unsecured loan to purchase a car.
If you can afford it, buying a car with cash can help you save time and money. Without the need for a car loan, you won’t have to research lenders, apply for financing or make monthly payments.
Of course, you’ll have to handle the transfer paperwork on your own, but most states offer online assistance. Your bank account could also take a huge hit, depending on the amount you’ve saved up. This can result in a significantly lighter emergency fund or needing more time to reach another financial goal.
Private-Party Auto Loan FAQs
If you wish to learn more about private-party car loans, you can check out the answers to these frequently asked questions.
Who offers auto loans for private-party purchases?
Few lenders offer private-party auto loans, but some large banks, credit unions, community banks and online lending platforms do. If you already have a bank or credit union you like to use, ask whether they offer this form of financing.
How can I get an auto loan for a private-seller transaction?
You can get a private-seller car loan a few ways, but it might be easier to find the option most suitable for you and apply online. Most lenders offer applications on their website or through an online portal.
Can I refinance a private-seller car loan?
Most car loans can be refinanced, but not all lenders offer car loan refinancing. You could also choose to use a personal loan to refinance your auto loan. Just keep in mind that personal loans have strict eligibility requirements.
Can I get a private-party auto loan with bad credit?
Just like with any type of loan, a borrower must meet specific conditions to qualify for a private-seller auto loan, although requirements vary from lender to lender. One lender may approve your application when another one doesn’t. But no matter your exact credit score, a higher one will improve your chances of securing a lower interest rate.
A private-party auto loan lets you buy a car through an individual, but this type of loan can come with a higher APR, shorter repayment term and strict vehicle requirements. By carefully reviewing the pros and cons of a private-party auto loan as well as considering its alternatives, you can find the best option for your situation.
If you decide to use a personal loan to buy a car, you can apply online today with Rocket LoansSM.
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