Private Party Auto Loan: What It Is, How It Works, How to Get One

These loans provide financing to buy a car from an individual seller

Fact checked by Betsy Petrick

What Is a Private Party Auto Loan?

A private party auto loan is a type of loan that you can use to finance the purchase of a car from an individual. Many financial institutions offer these loans, including banks, credit unions, and online lenders, but before applying for one, it’s best to shop around for the best rates and terms. 

Key Takeaways

• Private party auto loans allow car buyers to purchase a car from an individual and pay for it over time.
• Interest rates and loan terms can vary among lenders, so it’s important to compare offers.
• Your credit history plays a significant role in loan approval.
• Private party auto loans may have additional fees and costs.

How Private Party Auto Loans Work

Private party auto loans are a type of secured loan, using the vehicle as collateral. If the seller still owes money on the car, your lender may need to pay off the seller’s lender first. Then, your lender will give the remaining amount to the seller. Doing it this way ensures that you’re getting the car with a clear title. 

As with other types of auto loans, you will need to meet the lender’s requirements in order to be approved for financing. That can include a certain minimum credit score, proof of an adequate income, and a good credit history. For instance, if you have a negative mark on your credit report like a bankruptcy or loans going to collections, you are likely to have a harder time getting a loan than someone who doesn’t. 

Private party auto loans will differ from one lender to another. Features to consider include:

• Interest rates and loan terms. The annual percentage rates (APRs) and terms that lenders may offer you will depend on factors such as your credit history, the length of the loan, and the vehicle’s age and value. Lenders will offer their most competitive rates if you can show a history of on-time payments, particularly on previous auto loans.
• Loan amount and repayment options. The loan amount will depend on how large a down payment you are prepared to make, how much you need to borrow, and how much the lender is willing to lend you based on your creditworthiness. You may have the option to spread your payments over anywhere from 36 to 72 months, or even longer. But bear in mind that while a longer-term loan may mean lower payments each month, it will cost you more in the long run due to the interest charges.
• Fees and additional costs. Private party auto loans may have origination or application fees, as well as prepayment penalties if you want to pay off the loan earlier than expected. Many loans also impose late fees if you’re tardy with a payment.

Best Lenders for Private Party Auto Loans

These are three of the best lenders for private party auto loans based on Investopedia research.

Autopay

• APR range: 2.99% and up
• Loan terms: 2–8 years
• Loan amounts: $2,500–$100,000
• Credit requirements: Not disclosed
• Fees: Not disclosed

What stands out about Autopay: Autopay offers a variety of loans from partner lenders with competitive rates and terms. Though it doesn’t reveal its lenders until you submit your information, there are various options you can compare easily. 

PenFed Credit Union

• APR range: 6.49%–17.99%
• Loan terms: 3–7 years
• Loan amounts: $500–$150,000
• Credit requirements: Not disclosed
• Fees: $29 late fee, $30 returned payment fee 

What stands out about PenFed Credit Union: PenFed offers auto loans nationwide and allows applicants to get prequalified without affecting their credit score. Loans are available with a low minimum amount and one of the longest possible terms, at 84 months. 

U.S. Bank

• APR range: Starting at 7.26%
• Loan terms: 1–7 years
• Loan amounts: $5,000–$100,000
• Credit requirements: Not disclosed
• Fees: Late fee based on percentage of loan; prepayment penalty 1% of loan amount, up to a maximum of $100

What stands out about U.S. Bank:  U.S. Bank offers a rate discount if you opt into autopay, and you may not need to make a down payment. Plus, it has shorter repayment terms if that’s of importance to you and a pre-approval process online if you qualify. 

How to Apply for a Private Party Auto Loan

Many lenders offer private party auto loans, though some may have stipulations like the age or mileage of the vehicle. So try to check their requirements online before applying. To get an idea of what a particular loan would cost you, use a tool like our car loan calculator to estimate your monthly payments. Here are some basic steps:

1. Finalize terms with the seller. You want to go into the loan process knowing how much you’ll need to pay for the vehicle and how much of that you’ll have to borrow. Check your credit score at this stage to see what rates you will most likely qualify for. When negotiating with the seller, have a clear idea of the fair market value of the vehicle based on its condition. Online resources for this purpose include Kelley Blue Book.
2. Gather necessary information. Lenders will want certain information when processing your loan application, not only about you but about the car. That can include the age and make of the vehicle, its value, and other documentation like the seller’s vehicle registration, any loan documents, and the original bill of sale. 
3. Shop around. Taking the time to obtain quotes from multiple lenders will help you get the best rates and terms. See if the lender will give you a quote without it affecting your credit score. Don’t compare just APRs, but loan terms (lengths), fees, and other features.  
4. Fill out an application. Once you’ve picked a lender, head to its website to fill out a loan application and provide any additional documentation that’s requested. Some lenders may take a few days to process your application, but if you’re approved, you could receive funding as soon as the next business day.

Alternatives to Private Party Auto Loans

Instead of using a private party auto loan, these alternatives may be a better option:

• Paying in cash. Buying a vehicle with money you already have can save on interest costs, and you won’t need to worry about making loan payments every month. It can also be faster than applying for a private party loan. You can try to negotiate for a better price on the vehicle by telling the seller you can speed up the purchase by paying in cash. 
• Personal loans. Personal loans may offer more competitive rates, which could save you money in the long run. Some lenders may also offer lower loan minimums compared to private auto loans. In addition, personal loans are generally unsecured, so you could get one before you go car shopping.
• Dealership loans: If you buy your car from a dealer rather than an individual, you could be eligible for more favorable dealership financing or special promotions.

Risks and Drawbacks of Private Party Auto Loans

While private party loans can be a viable funding option, there are some risks and drawbacks to consider:

• Private party loans may have an annual percentage rate (APR) higher than other loan options. 
• You may need to pay an origination fee or make a substantial down payment.
• Lenders may reject your loan application because your vehicle is too old or isn’t in good condition.

Before purchasing a vehicle from an individual seller, be sure to have a trusted mechanic conduct a thorough inspection and get a vehicle history report. That way you’ll know exactly what you’re getting and can agree to a fair price if you decide to go ahead with the deal.

How Does a Private Party Auto Loan Impact My Credit?

A private party auto loan can affect your credit in several ways. When you submit an application, lenders will conduct what’s known as a hard inquiry on your credit report to judge your creditworthiness. Hard inquiries can have a small negative impact on your score. Once your loan begins, the lender is likely to report your monthly payments to the credit bureaus. That can be good for your score if you make all of your payments on time, but bad if you miss any.

How Long Is an Auto Loan Usually?

The average length of a used car loan is currently 70 months. But shorter and even longer-term loans are also available.

Who Offers Private Party Auto Loans?

Many financial institutions offer private party auto loans. So it’s worth checking with banks, credit unions, and online lenders. You might want to start your search with a financial institution you already do business with.

Can I Pay Off My Private Party Auto Loan Early?

In most cases you can pay off a private party auto loan early. Some lenders may charge a prepayment penalty, however, so you’ll want to check your contract.

Can I Refinance a Private Party Auto Loan?

It’s possible to refinance a private party auto loan if you can qualify for a new loan. Refinancing might get you better rates and terms, saving you money. However, in order to refinance, you may have to pay fees, such as origination fees for the new loan and prepayment penalties on the existing one if that’s stipulated in your loan agreement. So you’ll want to weight any potential savings against the costs.

The Bottom Line

A private party auto loan can be a viable option if you want to buy a car from an individual seller. Like other types of loans, the rates and terms you’ll qualify for will depend on your credit history and other factors. But that can vary from lender so, as with any kind of loan, it’s worth shopping around.

Read the original article on Investopedia.