What Is a Private Party Auto Loan and How Does It Work?

When you're looking to buy a car, a dealership is usually the first place you go. However, you may find more reasonably priced vehicles from private sellers. If you can pay for it in cash, it's a done deal, but if you need to finance your purchase, your best bet is to apply for a private party auto loan — a financial product designed especially for those who want to purchase cars from a private seller. It's a solid option if you prefer shorter loan repayment terms (less than 24 months) or have a less-than-ideal credit score.

If you're wondering what a private party auto loan is, it's a car loan that allows you to borrow from a lender to purchase a car from a private seller.

In October 2022, Kelley Blue Book put the average price of a used car at $27,564. While more affordable than a brand-new vehicle, purchasing one from a private seller can increase your savings. However, unlike dealerships, they don't offer in-house financing — a private party auto loan solves that problem for you.

It’s also your best bet if you don't have the best credit score. You can still get this auto loan with bad credit, but you’ll likely have a higher APR. Your other option is to take out a personal loan. However, you're still more likely to find lower rates with a private party auto loan, even with a low credit score.

However, there are also certain drawbacks to securing this kind of auto loan. They aren't as widely available as traditional ones because not all lenders offer them. Or, if they do, they may come with a higher APR. For example, the APR for a private party loan could be more than 2% more than a used car auto loan from the same lender.

The car you purchase also serves as collateral since this loan is secured. So if you fail to keep up with your loan obligations, the lender can seize your vehicle.

How a private party auto loan works isn't that different from a traditional one. However, some things true for a standard auto loan don’t apply to one for private car purchases, and vice versa. Understanding the similarities and differences is essential so that nothing falls through the cracks.

Here are some items to consider to understand the ins and outs of a private party auto loan:

• Collateral requirements: A private party auto loan is a secured loan, which means collateral is necessary. However, you don't need to put up an asset when you apply — the car you intend to purchase becomes the collateral. If you don't make the monthly payments, your lender can and will seize your vehicle.
• Loan terms: You'll be hard-pressed to find a traditional auto loan with repayment terms shorter than 24 months. However, loan terms for private party auto loans can range from 12 to 84 months. Going for a shorter timeline allows you to save on interest.
• Average rates and costs: You're more likely to get a higher APR for private party auto loans than a dealership's used-car loan. Lenders view purchases from individuals as riskier than those from a dealership. Dealerships also sometimes offer warranties and certifications that private sellers don't.
• Eligibility requirements: Like a traditional auto loan, lenders offering private party auto loans also consider your credit score and income. However, they also look at other things, such as a vehicle's age and mileage. Eligibility requirements may vary between lenders, so it's best to check specifics with them.
• APR Calculation: Your APR will depend on several factors. Lenders consider your credit history and preferred loan terms, similar to a standard auto loan. However, for private party auto loans, the vehicle's mileage and age may affect the APR, too.
• Application process: It might be easier to qualify for a private party auto loan than a traditional one despite the higher rates and associated costs, making it an excellent option for borrowers with poor credit standings. However, it might take longer to fund since lenders are more likely to ask for more information about the car you want to buy. These include its value or whether the owner still owes money on their auto loan.

Although private party auto loans aren't as widely available as their traditional counterparts, several financial institutions offer them. You can find private party auto loans from the following:

If you still can't find a lender after checking your options, you may have to consider ways to finance your purchase, such as personal loans. However, since these are unsecured loans, your credit history and income may affect your chances significantly. You're also likely to get higher APRs.

Typically, qualifying for a private party auto loan is less challenging than a traditional one. However, lenders look at several things before determining your eligibility.

• Credit score and credit history: Lenders may not require an excellent credit score, but it would be best to have a FICO score of at least 640. A better credit score indicates you can manage your debt well, resulting in more competitive rates.
• Income requirements: Lenders need assurance you can repay your loan, and proof of income is one way of doing that. However, the actual amount required varies between lenders.
• DTI ratio: Debt-to-income ratio indicates how much of your income goes into debt repayment. As your ratio increases, so does your risk level as a borrower.
• Type of vehicle: Lenders typically look at the vehicle's age and mileage. If it's clocked too many miles on its odometer or is too old, you may have challenges getting your loan approved.

Remember that these are general guidelines. Lenders typically have varying requirements, so it's best to check with them for specifics.

Taking out a private party auto loan may seem daunting, particularly if you're unfamiliar with the process. However, it might be your best loan option for a private party purchase.