Private auto loans: definition, uses, how to find one
What is a private car loan?
A private car loan allows you to finance a vehicle that you buy from a private owner.
“Millions of private vehicle sales take place each year, usually at lower transaction prices than what would normally occur at a dealership,” said Strati Papageorge, senior vice president of automotive product management for PNC Bank.
“These vehicles are generally older and have higher mileage, and offering financing to consumers looking to purchase such vehicles gives them flexibility and options that they might not otherwise have.”
There are some drawbacks to private auto loans, however. For example, they are not as widely available as loans for the purchase of new vehicles. And often they charge higher rates.
“Due to the nature of private sales, the rates tend to be higher than what you would see if you went to a dealership,” Papageorge says. “But the tradeoff for customers is usually a lower vehicle price, so they can still have an affordable payment.”
There are ways to alleviate the drawbacks associated with private auto loans and find a lender who will provide you with an auto loan that you can afford.
How a private car loan works
Here are some simple steps you should take to get 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 the interest rates and loan amounts you may be eligible for.
- Budget accordingly: Once you know your credit status, it will be easier to budget and decide how much you can pay out of pocket and how much you need to finance.
- Choose a vehicle: Before going to a private auto lender, make sure you know the type, age, and mileage of car you want. This will take into account the type of loan you are eligible for.
- Get loan quotes: In order to get the best loan, you will need to get quotes from a few potential lenders. Shop around to find the loan products that best suit your needs. Compare interest rates, loan terms, monthly payments, fees and penalties.
- Finalization of the loan: Once you find the best auto loan for a private party for you, the lender will send you a check, either to you or directly to the seller of the vehicle. The lender can even directly deposit the funds into your account. It may take a few days, so be sure to communicate this to the private seller.
- Transfer of vehicle ownership: This step depends largely 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 need to do to transfer ownership.
- Payment schedule: Many private auto lenders offer the option of setting up automatic payment or making payments through an online portal. Discuss your options with your lender to avoid missing payments.
Why consider a private loan
Although private auto loans may charge higher rates than standard auto loans, there are some advantages:
- There are better vehicle deals: The selling prices of private lien holders tend to be lower than those of car dealerships. With a private car loan, you get financing just like you would at a dealership, in addition to the savings that a private seller is likely to offer.
- It can be cheaper than a personal loan: A personal loan is likely to be more expensive because it is unsecured. A lender assumes more risk when there is no collateral to back up the loan in the event the borrower defaults.
- They offer flexibility: Rather than being limited to what a dealership offers, you can get the vehicle you want for a price you can afford from a private owner.
- There are bad credit loan options: Even those with poor credit might be eligible for private auto loans. However, as with all loans offered to borrowers with bad credit, they come with higher interest rates and hence have higher monthly payments.
Where to find private auto loans
Loan products vary from financial institution to financial institution, so not all lenders offer private auto loans. But you can get a private car loan from most major financial institutions, community banks, local credit unions, and online lenders.
Some lenders may require the vehicle to meet certain criteria. For example, they may require the car to be less than 10 years old with less 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 such small loans, you will need to find another lender.
Be sure to carefully consider the lender’s criteria before applying for a private car loan.
How to apply for a private car loan
Once you’ve found the vehicle you want to purchase from a private owner, be prepared to provide the lender with some basic personal information, including:
- Your full name, date of birth, address, social security number and contact details
- Information on employment and income.
- Current obligations, such as a mortgage.
You should also have on hand some documents and details about the vehicle you wish to purchase, including:
- Make and model, model year and mileage.
- The vehicle identification number, or VIN.
- Bill of sale which details the purchase contract.
- Copy of vehicle registration.
- Copy of vehicle title.
- A written repayment quote from the seller’s lender, if applicable.
Lenders have different requirements for the borrower and the automobile that will secure the loan. You should be able to know these requirements before you apply.
If your credit isn’t great, consider delaying the purchase until you improve your credit score. Waiting a few months won’t turn your credit from poor to perfect, but it can make a difference enough to save you on interest rate and monthly payments.
Alternatives to private auto loans
If your credit is not good enough or if the vehicle you have selected does not meet the lender’s criteria, there are alternatives that you can use to purchase through a private seller.
The best alternative to a private car loan would be a personal loan. With unsecured personal loans, the lender considers your income and your credit score to determine loan eligibility.
This can be a good option if:
- The vehicle you want to buy is too old or has too many kilometers.
- The vehicle is purchased with a salvage title. A rescue permit is issued when a vehicle has already been declared “total loss” due to major damage.
- The minimum loan amount is greater than the amount you want to borrow.
While a personal loan can give you the option of purchasing the vehicle you want, it will likely carry a higher interest rate than a private car loan and could end up costing you more overall.