Buying a used car is a great way to save a tremendous amount of money compared to purchasing a new car. Buying one from a private party, rather than a dealership, can save you even more cash. But, without a dealership to handle the paperwork, how do you get an auto loan on a private-party used car? The answer is a private-party auto loan (sometimes called a private-seller auto loan).
In this article we’ll look at private-party auto loans, exploring what makes them different, how to get them, and how to complete the transaction. Here’s what we’ll cover:
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- What Is a Private-Party Auto Loan?
- How Are Private-Party Loans Different Than Other Auto Loans?
- Where Do You Get a Private-Party Auto Loan?
- Can You Get a Private-Party Auto Loan With Bad Credit?
- How to Apply for a Private-Party Auto Loan
- Do Your Homework Before You Buy
- How Does the Seller Get Paid?
- Don’t Neglect the Paperwork
A private-party (or private-seller) car loan is simply auto financing where the proceeds of the loan are paid to a private individual, rather than to a car dealership. Different lenders use different funding mechanisms, but you’ll typically get a check written out to the seller, a check you endorse over to the seller, or a direct bank transfer to the seller’s account.
When you buy a used car from a private seller rather than an auto dealership, the transaction is more complicated in several ways. Lenders are used to working directly with dealers to fund car purchases, as most buyers use dealer-arranged financing. Having to work with private-party sellers who may or may not have the car they are selling paid off is more complicated and takes considerably more time.
There’s also increased risk for the lender, as more can go wrong with a private-party auto sale, consumer protections with private sales are not as strong, and generally the parties are not as experienced with the process. That additional level of risk is priced into the loan’s interest rate. Not only will you likely pay a higher interest rate and face more restrictive auto loan terms because you’re buying a pre-owned car, but you’ll pay even more because it’s a private-party sale.
Private-party used car loans typically take longer to fund than other car loans. Some lenders will want to know details about the car you are buying, its value, and whether the seller still owes money on their auto loan. Patience is required by everyone involved in the transaction.
Typically, the higher cost of financing is more than offset by the amount of money you can save by purchasing a used car from a private seller. The vehicle’s first owner will have taken a massive depreciation hit to the car’s value, so you’ll pay much less than the new car price. By purchasing from a private seller, you’ll eliminate the markups a dealer would charge. A bonus is that a private party likely has similar experience to you when it comes to negotiating, so you'll be more likely to meet in the middle on pricing. The private-party seller gets more than they would from a trade-in, and you'll pay a price that’s less than at a dealer: win-win.
One of the downsides of getting a loan for a private-party purchase is you won’t have a dealer to research financing options for you. You’ll have to do your own research. That can be a good thing in the long run. Dealerships typically mark up the fees and interest rates associated with car loans, and in most states they don’t have to disclose how much extra you’re paying. When you bypass the dealer, you don’t have to worry about paying anything more than your lender is asking.
Most, but not all, banks, credit unions, and finance companies offer auto loans to finance private sales. They’re easy to shop for online, though you should also check with any financial institutions you already have a relationship with, as some banks and credit unions offer relationship discounts to existing customers. You can also use online sites to get offers from multiple lenders with one application to find the best deal.
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If you are looking for a financial institution that offers more personal service and attention through what can be a complicated loan process, you might consider using a local community bank or a smaller credit union for your auto loan. Most big banks and some online lenders have more of a one-size-fits-all approach with limited customer support than a smaller institution might.
The Importance of a Preapproval
It's a good idea to start shopping for a loan a few weeks before you plan to buy a car. That will give you the time to thoroughly research your car loan options, get preapproved, and ensure that all the preliminary work is done and the lender won't delay your purchase. Note that a preapproval is different from being told by a lender that you prequalify for a loan. With a prequalification, you still need to fill out a complete loan application to get to preapproved status.
Seeking a preapproval is an excellent way to determine your car-buying budget. While a car affordability calculator can get you in the ballpark as to what kind of vehicle you can afford, finding out how much a financial institution will lend you and the loan terms they’ll offer can help you set a precise budget.
Yes, you can get a private-party car loan even if you have poor credit, though you’ll likely have to pay a higher interest rate and agree to stricter loan terms. In some cases that means you’ll have to make a larger down payment than a customer with good credit or agree to a shorter loan.
You can reduce the penalty interest rate you have to pay due to poor credit by checking your credit score at least a few months before you start car shopping. When you do so, you can identify problem areas on your credit report and work to improve your credit score before you start applying for loans. While you’re not going to move from bad credit to excellent credit in a few months, even a few points difference in your credit score can move you into a category lenders consider lower risk.
If your credit is subprime or deep subprime, the price of financing may make a car loan too expensive to consider. Not only will you have to pay a high annual percentage rate due to your credit score, but you’ll have to pay a premium for a private-party loan.
Our article on getting a car loan with bad credit provides a more detailed look at the process.
Much of the auto loan application process is the same for a private sale as it is for buying through a dealership, but most lenders are going to want a bit more information for the private sale. They’ll want to know the car’s vehicle identification number (VIN) and mileage, plus the seller's contact info. They'll also ask for documentation about any loans that are outstanding on the vehicle. Since the car is the collateral that secures the auto loan, some lenders will pull their own Carfax or other vehicle history report to make sure the amount they are lending is appropriate for the value of the car and find out if any liens could encumber the sale.
A loan application will ask for a barrage of personal information, including your assets, debts, employment, wages, and other financial obligations. If you are going to have a co-signer on the loan, they, too, will have to fill out an application. Be sure to list all monthly payments you make, including your mortgage, rent, credit cards, child support, and student loans. It is critical that you resist any urge to exaggerate your income numbers or lie about your debts. If the auto lender finds out before they approve the loan, they’ll likely decline to provide the financing. If they find out down the road that you fibbed on the initial application, most loans have clauses that allow the lender to immediately demand payment in full or declare the loan in default.
The lender will also pull your credit score (and the scores of any co-signers). Between the credit reports and loan applications, they can build a picture of your creditworthiness, or likelihood to pay back the loan on time. They'll look at your debt-to-income ratio to see how the monthly payments might fit into your budget. They will also look at the amount of the loan to the value of the vehicle. In order to get the best interest rate, you want to make a large enough down payment that the loan-to-value (LTV) ratio is well below 100 percent.
At that point the lender will approve the loan at the interest rate and loan length you asked for, counter with an approval that has different terms or requires a specific down payment, or decline the loan.
A declined loan can be a blessing in disguise. It means a lending professional does not believe your financial circumstances will allow you to support the monthly loan payments. A denial can keep you from getting a loan that buries you financially and further harms your credit score.
Buyers can read more about financing and loan applications in our article on getting a car loan.
It is crucial to remember that you are buying a used car and you must do your due diligence to make sure it is in good shape before you buy it. If it breaks down a week after you purchase it, you still have to make your auto loan payments for the life of the loan. Major repair costs can stress budgets, leading some to have to decide whether to make a car payment on time or pay the shop to get your vehicle back on the road.
There are two main tools in your toolbox to make sure you’re getting a good used car. First is a vehicle history report from a company such as Carfax or AutoCheck. A vehicle history report does an excellent job at showing an automobile's collision history, title records, number of owners, and completed maintenance. If the vehicle history report raises any red flags, you'll either need to get an explanation that's acceptable to both you and your lender or walk away from the deal.
Read our article on vehicle history reports to learn more.
The second step any used car buyer needs to take is getting the vehicle inspected by a trusted independent mechanic. A good mechanic can find issues not reflected in the vehicle history report, look for problems common to that model of vehicle, and assess any maintenance or collision damage repairs that have been performed. If the seller balks at allowing a mechanic to inspect a private-party used car, it should raise a huge red flag, and you should not purchase the vehicle.
In addition to checking out the car, you’ll also want to make sure the seller is on the up and up. There’s an age-old issue in the person-to-person used car market where small-time dealers act as private parties to avoid licensing, consumer protection rules, and taxes. These “curbstoners” are frequently found advertising cars in parking lots or on automotive classified websites. The easiest way to identify an illegal dealer is to call them and tell them you are interested in “the car.” If they ask “which car” you’ve likely found a curbstoner. In some states, it’s a legal endeavor as long as they only sell a few cars per year.
Another way to identify a dealer posing as a private-party seller is to ask to see the car’s registration and their driver’s license. If the names and addresses on the two don’t match, you’ll want an acceptable explanation before you proceed. It’s a good idea to avoid curbstoners; if they are lying about their dealership status, there’s a fair chance they’re also lying about the condition of the vehicle.
Payment is where a private-party loan can get rather complicated and where patience is your best tool. After agreeing to a purchase price and terms, you’ll need to give the car’s VIN and sales price to your lender so they can finalize the loan and provide funding. They’ll typically send you a check that you can sign over to the seller, cut a check to the seller themselves, or do an electronic transfer into the seller’s bank account.
If the seller still has a loan on the vehicle, your lender will demand that it is paid off before the sale can go through. In many cases, they’ll work directly with the other lender to pay off the loan and ensure a clear title can be issued. It may take some time for the seller to get a title from their lender, so as a buyer you may need to be patient. In some states, once the seller receives the title, they have to go to the DMV to have the lienholder (lender) removed from the document before they can sell the car, further delaying the sale.
Before you hand over a check, a private seller needs to have a clear title they can sign over to you. That’s an absolute rule for car buyers: No title, no check.
Whatever you do, it is never advisable to bring cash when buying a car from a stranger. It's a smart idea to meet the seller at your lender if the financial institution has brick-and-mortar locations. When you do so, the seller can check the authenticity of the check, and you’ll have the comfort of not being alone.
Our complete guide to buying a used car explores the best pre-owned car buying strategies in detail.
Once you've handed over payment and received the title to your new ride, your work isn't quite done. You'll need to make a trip to your local DMV to have the title changed into your name and the lender listed as a lienholder on the document. They'll need to know the exact mileage of your vehicle when you purchased it and the date you did so. You want those items to be exact, so you're not liable for any parking tickets or traffic infractions that occurred just before you bought the car.
When you apply for the new title, in some states you’ll be asked to pay sales tax on the price of the car. It’s important for private-party buyers and sellers to create a bill of sale that includes the date the car was sold, its price, and any other agreed-upon terms.
Private-party buyers also need to contact their auto insurance company and add the car to their policy. The insurance agent will need information about your auto lender so they can add them as a lienholder on your policy. Our car insurance hub can help you find the coverages you need, the auto insurance discounts you’re entitled to, and the best insurance company for your needs.
It’s a good idea to use your lender’s online banking system or talk to a loan officer about setting up automatic payments on your auto loan. That way you'll never miss a payment, and your credit score will reflect your disciplined payment history.
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