How a private party auto loan works

The lure of lower prices and a wider selection sends many car buyers to private sellers. But buying from an individual instead of a dealership may still require financing – which is where private party auto loans come in.

A private party auto loan is designed specifically to help you purchase a car from a private owner, with the lender helping to verify the vehicle, handle the payment, and manage the title transfer. Here’s how the process works, plus tips for finding a lender and avoiding common pitfalls so that you can confidently shop for your new wheels.

Find lenders and check your eligibility

Private party auto loans aren’t as widely available as standard car loans. Some large banks and online lenders don’t offer them, while certain credit unions may require you to be a member. In some cases, lenders only process private party loans for buyers and sellers within the same state because of title transfer rules.

Vehicle restrictions are another factor to keep in mind. Many lenders limit the age, mileage, or title status of the car they’ll finance.

If you find that a standard online auto loan better fits your needs, you’ll still have that option. But if you’re set on a private-party purchase, try:

• Checking with your bank or credit union.
• Searching online for “private party auto loans.”
• Comparing online-only lenders.
• Asking for referrals from mechanics, used car dealers, and friends.

Start a list of possible options and make note of each lender’s credit score and income requirements. This information can make the application process go faster once you’ve chosen a car.

Get prequalified

Getting prequalified for a loan is a smart move because it gives you a realistic budget before you start car shopping without affecting your credit score. Even better? It can speed things up when you’ve found the right vehicle because you’ve already given the lender basic information about your finances.

The process is simple: You provide the lender with personal and financial information, and the lender gives you an estimated loan amount and interest rate range based on a soft credit check. Details about the vehicle usually aren’t required at this stage, making prequalification ideal if you haven’t chosen a car.

Once you’ve found the car you want, you can get preapproved. This typically requires a hard credit inquiry and provides a firmer loan offer pending final vehicle verification.

Bonus tip: Ask the lender how long a preapproval is valid (often 30 to 60 days) and whether it can adjust the loan amount if you choose a more or less expensive car.

Shop for a car

Private-party car sales typically don’t have the same protections as dealership purchases, so it’s critical to thoroughly research vehicles before you buy. A good first step is to get a vehicle history report.

A vehicle history report provides key details about the car, such as its mileage, number of owners, and reported accident history. You’ll also learn the car's title status so you can confirm there are no outstanding liens before you buy. The National Motor Vehicle Title Information System offers a list of approved vendors that sell these reports.

Other important steps to finding the right car include:

• Checking the fair market value. Make sure the asking price is reasonable by looking up the make and model in the Kelley Blue Book or Edmunds.
• Test driving the car. This helps you see how it handles and may reveal issues you wouldn’t otherwise spot.
• Taking the car to a mechanic. Private-party sales are usually “as-is,” so have a professional thoroughly inspect the car before you negotiate the price.

You also want to keep an eye out for fraud. If a seller won’t provide the vehicle identification number (VIN) or the name on the title doesn’t match the seller’s ID, consider it a red flag and move on.

Apply for and finalize the loan

With a private party auto loan, you typically apply after negotiating the price. That way, you avoid borrowing too much, which means paying interest on money you didn’t need, or too little, which could leave you scrambling for extra funds.

The lender will need documentation to verify your identity, financial situation, and the vehicle you’re buying.  These typically include:

• Government-issued identification.
• Employment and income information.
• Details about any other debts.
• Proof of auto insurance.
• The car's make, model, mileage, and VIN.
• Copies of the registration and title from the seller.

Some lenders may also require an inspection or valuation to confirm the vehicle’s worth.

Once everything is approved, the lender will provide the terms of the loan, including interest rates and repayment schedule, for you to review and sign. The lender typically sends the funds directly to the seller or their lienholder.

Handle the paperwork

Finalizing the loan isn’t quite the end of the process. You’ll still need to complete a few essential tasks:

• Create and sign a bill of sale. This document records the transfer of ownership and releases the seller of any liability associated with the car. It must be signed by both parties and may be required for registration.
• Transfer the title. The seller must sign the title over to you, and the lender needs to be added as a lienholder until the loan is paid off.
• Register the vehicle. Depending on your state, you may need a completed title, bill of sale, proof of insurance, and other documents to register a car. Your lender may also require proof of registration once the process is complete.

Drive away with confidence

Buying a car from a private seller can offer better deals and more options, but it often requires extra care and preparation. When you understand how private party auto loans work, and take the time to research lenders, get prequalified, and verify the vehicle, you can navigate the process smoothly and end up with a car you’ll enjoy for years to come.

Sources

https://www.experian.com/blogs/ask-experian/what-is-private-party-auto-loan-and-how-to-get-one/

https://www.nerdwallet.com/article/loans/auto-loans/vehicle-history-reports-key-cars-past