What is it and how to find one
A private loan – financing for car buyers buying from a private owner – may be easier to obtain than traditional loans. However, lenders may charge more because a private purchase is considered riskier than buying from a reseller.
What is a car loan between individuals?
A car loan between individuals allows you to finance a vehicle sold by the owner and not by a dealer.
“Millions of retail vehicle sales occur each year, typically at lower transaction prices than would normally occur at a dealership,” says Strati Papageorge, senior vice president of automotive product management for PNC Bank. .
“These vehicles are typically older and have higher mileage, and offering financing to consumers who wish to purchase such vehicles gives them flexibility and options they might not otherwise have.”
Auto loans to individuals have some disadvantages, however. For example, they are not as widely available as loans for the purchase of new vehicles. And often they have higher interest rates.
“Due to the nature of private party sales, prices tend to be higher than what you would see if you went to a dealership,” says Papageorge. “But the trade-off for customers is usually a lower vehicle price, so they can still have an affordable payment.”
There are ways to alleviate the inconvenience associated with peer-to-peer auto loans and find a lender who will offer auto loan you can afford.
How a car loan between individuals works
Your budget and the local availability of used cars will be the main factors to consider. Fortunately, the funding process itself is quite similar to buying a new or used car from a dealership.
Create a budget
To create your shopping budget, start with your credit history and score. By checking your credit, you will have a good idea of what interest rate and loan amounts you may be eligible for.
Once you know your credit status, it will be easier for you to calculate your monthly paymentdecide how much you can pay out of pocket and determine how much you will need to fund.
Choose a vehicle
After establishing your budget, find out what type of vehicle you want. Know the type, age and mileage of the car you want before approaching a lender. This will determine the type of loan you qualify for.
You can also check the cost with your own estimates from reliable sources, like Edmunds and Kelley Blue Book. These can guide you to a reliable car.
And don’t be discouraged if you can’t find exactly the make, model and finish of your dreams. Private sales are naturally limited to local inventory, so you should have a few options in mind. You might be able to use a national website to find the right car, but traveling for a test drive and buying — and handling out-of-state title transfers — can be more trouble than the car is worth.
Once you know which vehicle you plan to buy, compare the prices and consult with a few potential lenders to find the loan products that best suit your needs. Compare interest rates, loan terms, monthly payments, fees and penalties.
Not all lenders offer car loans to individuals, so confirm that the one you are interested in does. Since personal loans are usually more expensive, it’s essential to check rates and get pre-approved before you start shopping. This way you will have a good idea of what you can spend and what you can expect to pay each month.
Finalize the deal
After signing the loan agreement, your lender will send a check either to you or directly to the seller. If you or the seller opts for direct deposit, make sure the seller is aware that the transfer of funds may take a few days.
The state in which the transaction takes place determines what must be done to legally transfer ownership to you. This can be found on your state’s Department of Motor Vehicles website and should be reviewed before purchasing the car.
Your lender will provide you with payment due dates and a Amortization schedule, which tells you how much money will go to interest and principal each month. If you can, opt for automatic payment. It’s a great way to make sure you pay on time without sending a check or constantly logging into an online portal. Just be sure to check that payments have been made each month.
4 reasons to consider a private loan
Although personal auto loans may charge higher rates than standard auto loans, there are some advantages:
- There are better vehicle offers: Selling price from private sellers tend to be lower than car dealerships. With a private auto loan, you get financing just like you would at a dealership, plus the savings a private sale is likely to offer.
- It can be cheaper than a personal loan: A Personal loan is likely to be more expensive because it is not guaranteed. A lender assumes more risk when there is no collateral to secure the loan if the borrower defaults.
- They offer flexibility: Rather than being limited to what a dealership offers, you can get the vehicle you want affordably from a private owner.
- There are loan options for bad credit: Even those with poor credit might be eligible for private auto loans. But like all loans offered to borrowers with bad credit, they come with higher interest rates and monthly payments as well as a higher overall cost.
Where to find car loans between individuals
Not all lenders offer auto loans to individuals, but most major financial institutions — like community banks, local credit unions, and online lenders — do.
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 100,000 miles in order to consider the buyer for a loan. This is common with any used car, whether you buy it from a dealership or a private seller.
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’ll need to find another lender.
Carefully review the lender’s criteria before applying for a car loan from a private party to avoid damaging your credit for a loan you don’t qualify for.
How to apply for a car loan between individuals
Once you’ve found the vehicle you want to buy from a private owner, be prepared to provide the lender with basic personal information, including:
- Your full name, date of birth, address, social security number and contact information.
- Employment and income information.
- Current debt securities, such as a mortgage.
You should also have certain documents and details on hand regarding the vehicle you wish to purchase, including:
- Make and model, model year and mileage.
- The vehicle identification number, or VIN.
- Deed of sale which details the purchase contract.
- Copy of vehicle registration.
- Copy of vehicle title.
- A written payment estimate from the seller’s lender, if applicable.
Lenders have different requirements for the borrower and the car that will secure the loan. You should be able to find out what these requirements are before you apply.
If your credit is not good, consider delaying the purchase until you improve your credit score. Waiting a few months won’t turn your credit from bad to perfect, but it can make enough of a difference to save you money on the interest rate and monthly payments.
Alternatives to car loans between individuals
If you haven’t received approval, or can not find a private auto loan that matches the car you want to buy, there are still alternatives you can pursue to buy through a private seller.
Compare personal loans
The best alternative to a car loan between individuals would be a Personal loan. With unsecured personal loans, the lender considers your income and credit score to determine loan eligibility. The vehicle will play no role in an approval decision.
This may be a good option if:
- The vehicle you want to buy is too old or has too many kilometres.
- The vehicle is purchased with a salvage title.
- The minimum loan amount is more than you want to borrow.
Although a personal loan can give you the flexibility to buy the vehicle you want, it will likely carry a higher interest rate than a private car loan and could end up costing you more.
Shop at a dealership
Dealerships may have higher prices than private sellers, but getting a loan is much easier. If you have been rejected for a private car loan, check to see if you qualify for in-house financing offered by the dealership. You may also qualify for a used car loan from a lender who previously rejected you for a private loan.
You will also have a different selection of vehicles. This may not be the ideal circumstance if you are really looking to go through a private sale, but it may be the most accessible option.
Build up your savings
If you are not in a hurry or do not have haven’t found the right private sale yet, continue to grow your savings. The more you can invest in a car, the less money you will spend overall. And if you’re looking for older, cheaper models that would not benefit from a traditional loan, you won’t need to take additional risks by financing your car with a personal loan.
The bottom line
Auto loans to individuals are a quick, relatively pain free way to buy outside of a dealership’s high-pressure environment. They are not as common, but you will still be able to find competitive options from various lenders. And since the selling prices for private purchases are lower than those charged at the dealership, you may be able to save money.