What is a private party auto loan, and how do you get one?

If you have found your dream car outside a dealership but can’t pay cash, securing a private party loan is the right next step. These loans offer flexibility: Rather than being limited to what a dealership offers, you can get the vehicle you want from a private owner at a price you can afford.

Private party loans can be easier to qualify for than traditional loans. However, lenders may charge more because buying from an individual is considered riskier than buying from a dealer. Despite the higher cost associated with private party auto loans, there are ways to find lenders that offer auto loans you can afford.

What is a private party auto loan?

A private party auto loan lets you finance a vehicle sold by the owner, not a dealer. Buying from an individual often means paying less for the car itself. But since they come with more risk to the lender, they’re not as widely available as other auto loans — and often, they have higher interest rates. Unlike many traditional loans, private party auto loans require you to provide vehicle info when you apply.

“Because of the nature of private party sales, rates tend to be higher than you would see if you went to a dealership,” says Strati Papageorge, senior vice president of auto product management for PNC Bank. “But the trade-off for customers is generally a lower vehicle price, so they can still have an affordable payment.”

There are ways to mitigate the drawbacks associated with private party auto loans and to find a lender that will offer an auto loan you can afford.

Where to find private party auto loans

Most large financial institutions — like community banks, local credit unions and online lenders — offer private party auto loans. The vehicle will need to meet certain criteria. For instance, lenders typically require the car to be under 10 years old with fewer than 100,000 miles.

Other lenders may have a minimum loan amount. If the vehicle you want is $6,000, but the lender doesn’t offer loans that small, you will have to find another lender.

Carefully review the lender’s criteria before applying for a private party auto loan to avoid taking a hit to your credit for a loan you don’t qualify for.

Start your search by reading some of Bankrate’s reviews.

• myAutoLoan. This online loan marketplace offers private party loans of $8,00 and up. The lender stands out for its flexible approval standards and funding as soon as the next business day.
• Regions Bank. This regional bank offers loans for amounts between $5,000 and $125,000. You can finance up to 110 percent of the vehicle’s value.
• M&T Bank. The Buffalo-based bank is an excellent choice for those looking to purchase a less expensive vehicle to use for parts. Borrowers can finance for as little as $2,000 and enjoy 24-hour customer service.
• Bank of America. For those who prefer a large financial institution, borrowers can finance their private party purchase starting at $7,500. The bank charges few fees.
• PNC Bank. You can borrow up to $100,000 and receive funding in as little as one day. The bank also has a vast branch footprint, which is great for those who prefer in-person support.

How to apply for a private party auto loan

Your budget and the local availability of used cars will be the biggest factors to consider. Fortunately, the actual financing process is similar to shopping for a new or used car at a dealership.

1. Create a budget

To create your budget, start with your credit history and score to estimate what interest rates and loan amounts you might qualify for. Once you know the state of your credit, it will be easier to calculate your monthly payment, decide how much you can pay out of pocket and determine how much you will need to finance.

2. Choose a vehicle

Check the cost-to-own estimates from trusted sources like Edmunds and Kelley Blue Book. These can help guide you toward a reliable car. You may be able to use a national website to find the right car, but traveling for a test drive and purchase — and dealing with out-of-state title transfers — may be more trouble than the car is worth. When you’re ready to buy from a private seller, review your state’s laws on title transfers. These should be available on your state’s Department of Motor Vehicles website.

3. Compare lenders

Once you know what vehicle you intend to purchase, shop for prospective lenders offering private party auto loans. Compare interest rates, loan terms, monthly payments, fees and penalties. Because private party loans are typically more expensive, apply for preapproval before shopping. This way, you will have a firm idea of what you can spend — and what you can expect to pay each month.

4. Apply for a loan

After you find the vehicle you want to buy from a private owner, be prepared to provide a lender with basic personal details, including:

• Your full name, birthdate, address, Social Security number and contact information.
• Employment and income information.
• Current debt obligations, such as a mortgage.

You should also have certain documents and details about the vehicle you want to buy, including:

• Make and model, model year and mileage.
• The vehicle identification number, or VIN.
• Bill of sale that details the purchase agreement.
• Copy of the vehicle registration.
• Copy of the vehicle title.
• A written payoff quote from the seller’s lender, if applicable.

5. Finalize the deal

After you find a vehicle and sign the loan agreement, your lender will send a check either to you or directly to the seller. If you or the seller opt for direct deposit, make sure the seller knows that transferring funds can take a few days.

Your lender will provide payment due dates and an amortization schedule, which tells you how much money will go to interest and principal each month. If you can, opt for autopay.

This is a great way to ensure you pay on time without sending a check or constantly logging in to an online portal. Just be sure to check that payments have gone through each month.

Alternatives to private party auto loans

If you did not receive approval or can’t find a private party auto loan that fits the car you want to buy, there are alternatives.

Personal loans

The best alternative to a private party auto loan is a personal loan. With unsecured personal loans, the lender considers your income and credit score to determine loan eligibility. The vehicle won’t play a 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 miles on it.
• The vehicle is being purchased with a salvage title.
• You can’t find a small-enough private party loan.

While a personal loan can allow you to purchase the vehicle you want, it will likely carry a higher interest rate than a private party auto loan.

Dealership loans

If you’ve been rejected for a private auto loan, it might be time to visit dealerships instead. See if you qualify for in-house financing offered by a dealer. Dealers may have higher prices than private sellers, but getting a loan is much simpler. You may also qualify for a used auto loan with a lender that previously rejected you for a private loan.

Buy in cash

If you are not in a rush or have yet to find the right private sale, keep building your savings. The more you can put toward a car, the less money you will spend overall. And if you are looking at older, cheaper models that wouldn’t qualify for a traditional loan, you won’t need to take on extra risk by financing your car with a personal loan.

The bottom line

Private party auto loans are a quick, relatively pain-free way to buy outside a dealership. They aren’t as common, but you can still find competitive options from various lenders. And since sale prices for private purchases are lower than those at a dealership, you may be able to save money.