Getting a new set of wheels is an exciting feeling. But like so many, you might be unable to pay cash for a car.
Purchasing a new car often involves an auto loan.
For your convenience, you can purchase a car and secure financing at many dealerships.
But what if you’re not buying from a dealership?
Can you still get an auto loan?
Yes, you can get an auto loan to buy a car via a private sale.
Do Private Party Auto Loans Exist?
There’s no rule that says you have to buy a car from a dealership.
Check local classified ads and you’ll find many people in your community selling their vehicles themselves.
If you require financing when buying a car from an individual, you’ll need to get a private party auto loan.
Where to get them
These loans are offered by many banks and credit unions and they’re designed specifically for individuals who want to buy a car from a private seller.
Buying from a dealership is convenient, as many dealers offer some type of warranty with a vehicle purchase. But at the same time, buying from a private seller may result in a better deal.
Dealerships have expensive overhead. This can drive up prices, leaving little room for negotiations.
Some people prefer private party sales because they’re able to avoid pushy salespeople, resulting in a more relaxed, simple transaction.
Private Auto Loan vs. a Regular Loan
For the most part, private party auto loans are the same as a regular auto loan, in that both loans are used to finance the purchase of a car.
But there are a few differences you need to know about before going this route.
Keep in mind:
If you secure auto financing through a dealership, you might receive a longer auto loan term. The dealer may work with finance companies that allow auto loans up to five or six years.
On the other hand, if you get a private party auto loan from a bank, you may only be eligible for an auto loan term up to three or four years, depending on the age of the vehicle.
A shorter auto loan term translates into a higher monthly payment.
The good news is that you’re able to pay off the car sooner with a shorter term.
Plus, you’ll save on interest over the life of the loan.
Be mindful that some private party auto loans come with higher interest rates.
Private party sales involve used cars, and used car loans typically have higher interest rates than new car loans.
Another difference between a private party auto loan and a regular auto loan is how you secure financing.
If you’re buying a car from a dealership, the process usually involves finding a car first, and then apply for financing. Once you are ready to move forward with a purchase, the dealership coordinates the financing and handles the paperwork.
In a private party sale, you’re responsible for finding your own financing. This might involve speaking with your bank and getting pre-approved for a loan “before” looking for a vehicle.
How to Get a Private Party Auto Loan?
Thinking about getting a private party auto loan? Here’s what you need to do.
1. Check your credit
A bank or credit union will check your credit before approving your application, so it’s important to know where you stand. Besides, credit not only affects approval, but it also affects your interest rate.
You don’t need perfect credit to get approved. Even so, the higher your credit score the better. A credit score of 700 or above is considered good, so aim for this range.
To improve your credit, pay your bills on time, pay down credit card debt, don’t apply for credit unnecessarily, and dispute any errors on your credit report.
2. Apply for a loan
Don’t shop for an automobile until you’ve been pre-approved for a car loan.
A pre-approval doesn’t guarantee the loan, but the bank will review your income and debts to determine what you can afford.
This way, you know the maximum you’re able to spend on a car. This prevents falling in love with a car that you can’t purchase.
You’ll need to bring proof of employment and income.
This includes your most recent paycheck stub, W-2, or tax return. If you are self-employed, you’ll need to provide tax returns from the previous two years.
You can apply for a private party auto loan in-person or online.
When applying for a car loan, be mindful that lenders may set certain limits. Since you’re purchasing a used car, the bank might only approve of cars up to a certain age and mileage.
3. Get multiple auto loan quotes
You don’t have to get a private party auto loan from your current bank.
Your bank might offer a competitive rate. Still, contact at least one or two other financial institutions to request a free rate quote.
Another bank might offer rates cheaper than your bank. A low rate reduces how much you’ll pay in interest and save you money each month.
4. Schedule a closing date
Once you’ve found a car and agreed to a purchase price, call your lender to schedule the loan closing.
In many instances, you’ll have to close in-person at a branch.
Online lenders, however, may overnight closing paperwork to you, and then send a check once you return the signed documents.
Some banks may require the seller to attend the closing, too.
Items you’ll need on closing day include a copy of the vehicle registration, a copy of the front and back of the vehicle title, and the bill of sale. The bill of sale indicates the purchase price of the car.
If the seller doesn’t own the car free and clear, they can’t provide a vehicle title. In this case, they’ll need to provide a written payoff quote from their auto loan lender (lien holder).
After signing the paperwork and finalizing the loan, your lender either cuts a check to the seller for the purchase price or sends a check to their lien holder.
5. Complete titling and registration
Getting an auto loan is only the first step of a private party sale. You’re also responsible for titling and registering the car.
After closing, take the title (which transferred to your lender at closing) and the bill of sale to the Department of Motor Vehicle (DMV).
Make sure the title indicates your lender as the lien holder. The DMV will send a copy of the title to your lender once the titling process is complete.
While at the DMV, you’ll also register the car and pay tax, title, and licensing fees. You’ll need to bring proof of car insurance, your driver’s license, and a method of payment.
The sooner you complete the titling and registration process the better. Most states require completion of this step within 10 to 30 days of a private party purchase.
Tips for Buying a Car from a Private Party
Order the vehicle’s history report from CarFax
You’ll receive information about odometer readings, and you’ll find out whether the car’s been involved in an accident.
Run a title check to search for liens on the car
You’ll need the car’s vehicle identification number (VIN).
It’s usually located near the corner of the dashboard on the driver’s side. Or on the metal plate on the driver side door.
Visit your state’s Department of Motor Vehicle website and search the number.
You can expect a lien if the seller hasn’t paid off their original loan yet. This isn’t a problem and your bank will make a check out to their lender at closing.
The car may also have a lien if the owner failed to pay for auto repairs, or if they used the car as collateral for a personal loan.
Don’t purchase the car until these liens are paid, or else the lien holder could repossess the vehicle through no fault of your own.
Research Kelley Blue Book
Here, you’ll find the private party value of the car. This provides a starting point for negotiating the price.
Get the car inspected
In addition to a test drive, have a mechanic inspect the vehicle before purchasing.
Most sellers will not have a problem with this, especially if you invite them to accompany you.
If someone does have an issue with an inspection, they might be trying to hide a problem with the car.
Pay with a cashier’s check
If you don’t get a private party auto loan, another alternative is paying for a used car with your own funds.
In this case, never use cash. You’ll want proof that you actually handed over funds, so pay with a personal check or a cashier’s check.
A private party auto loan gives you the flexibility to buy your car from anyone and anywhere, rather than going through a dealership.
Working directly with a seller often results in a faster process and a better sale price.