This Is What You Should Know About Private Party Auto Loans

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Buying a used car can be a tricky process, from getting approved for financing to checking out the history and maintenance of the vehicle. But what happens when you want to buy a used car from a person rather than a dealership?

Before you purchase the car you’ve been eyeing, it’s helpful to learn the ins and outs of private party auto loans, where to shop around for them and how to make sure you are getting the best deal.

Here are some guidelines on how to navigate the used car industry and get the most competitive interest rate for your private party auto loan.

What is a private party auto loan?

A private party auto loan is one option for would-be car owners purchasing a used vehicle from an individual rather than a dealership. Those who don’t have the savings to pay for the car may need to seek financing from a lender who offers private party auto loans.

Your car will serve as collateral like it would with a regular auto loan.

Where can you find a private party auto loan?

There are many lenders who offer private party auto loans, including banks, credit unions and online lenders. Some examples include Bank of America, First Credit Union and LightStream.

Requirements. Lenders have their own specific requirements to qualify for a loan, such as a minimum credit score, income and down payment. They could also have a maximum limit on the age of the vehicle and/or the number of miles it has accumulated.

Rates. You can expect a higher rate on a private party loan used for a used vehicle versus a loan used for a new car. For example, LightStream offers private party auto loans at APRs as low as 4.99%, but it offers new auto loans at APRs as low as 3.99%.

With used cars, the lender is taking on more risk and, in turn, charges a higher interest rate. Used cars depreciate more in value because there is more mileage on the vehicle, along with more wear and tear on the engine, tires and other parts.

Terms. The length of a private party auto loan is similar to that of loans for new and used cars that have been purchased directly from a dealer. For example, LightStream offers loan terms between 24 and 84 months for both private party and regular auto loans.

Steps to take before you buy

Compare rates from multiple lenders. After you’ve narrowed your search to the vehicle you want to purchase, you should start shopping around on how to finance it if you find you need a private party auto loan.

You’ll also be able to find out which lender offers the lowest APRs by comparing them online. You can go to LendingTree and fill out an online form. Based on your creditworthiness, you could be matched with up to five different loan offers from lenders.

LendingTree
APR

As low as
3.99%

Terms

24 To 84

months

Fees

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

Still, one important thing to remember is that each time a lender checks your credit score, your overall score will be impacted. Coordinate your searches for private party auto loans only when you are ready to make the purchase so that they occur within a 14- or 45-day period, which has less of an impact to your credit score.

Shop at a credit union first. Another important factor to look out for is the APR for your potential loan — a lower APR means that more of your money goes toward the principal of the loan. Make sure you compare auto loan rates from various lenders, including banks and credit unions. Banks will sometimes give a better rate if you are already a customer, though the lowest rates are often offered by credit unions — see if there is one in your neighborhood that you qualify for if your employer does not belong to one. For example, you could get a private party auto loan through First Credit Union at an APR as low as 3.84%.

Consider trade-in options. Since you’re purchasing the vehicle from an individual rather than a dealership, you should check with a business like Carvana or CarMax if you have a vehicle to trade in.

Be sure you’re getting a good deal. The way to determine the best price for a particular brand and model of a vehicle is to compare selling prices from industry standards, including the National Automobile Dealers Association, Kelley Blue Book and Edmunds. These guides are also helpful if you’re trading in your car and want to use the proceeds for a down payment.

Until you are ready to purchase a vehicle, continue to shop around on auto marketplaces or dealer websites. They could offer a discount for cars in different colors and features that may not be a priority for you.

Save your online research and show an individual car owner what other dealers are offering. Show them what their competitor’s price is and see if they are willing to lower their price.

Alternatives to a private party auto loan

Obtaining a personal loan is an option, especially for car owners with lower credit scores or shorter credit histories. Personal loans are typically used by consumers to pay off high-interest debt, like credit cards. An individual could use a personal loan for the purchase of a used car — along with a down payment — instead of seeking a private party auto loan. With a personal loan, your car also wouldn’t be used as collateral.

However, while personal loans allow an individual to borrow a set amount of money for a fixed period with a fixed interest rate, their interest rates are often higher than an auto loan that has collateral (the car itself). These loans usually range between 24 and 60 months.

Another option is a home equity loan. You can qualify if you have enough equity in your house, which is used as collateral. These loans, available from lenders including banks and credit unions, can be used for various purposes. Once you are approved, the lender will give you a lump sum of money, which can be used toward the purchase of a vehicle.

You’ll make monthly fixed payments when you receive a home equity loan, similar to how a traditional auto loan works. Beware, though, that you’ll likely have to pay closing costs and other fees with this type of loan. It’s always important to know all costs associated with a loan before comparing options.

The bottom line

Car buyers have several loan choices they can make before committing to a major purchase. Private party auto loans are another common option to finance your vehicle. Once you’ve chosen the vehicle you want to buy from another individual, you should check your credit history and consider whether you have a vehicle to trade in.

Start shopping around for private party auto loans to get the best interest rate and a lower monthly payment.

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Ellen Chang
Ellen Chang |

Ellen Chang is a writer at MagnifyMoney. You can email Ellen here

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