If you have questions about financing a used car purchased from a private seller, you’re not alone. Many people conduct a private party transaction in the US each year (over 11 million people actually) and need help understanding how to get a private party auto loan. The good news is it doesn’t have to be complicated. Step by step, this article will help guide you on the path to securing the best private party auto loan.
What Is a Private Party Auto Loan?
If you’re buying a used car from a private seller and can’t bear the total cost of the vehicle, you will need to get a loan. You have two viable options for types of loans: personal loans and private party auto loans. Financial institutions offer both loan types, but they have several key differences.
Personal loans are not limited to just buying a car. You can get a personal loan for any large purchase outside your out-of-pocket range. So, when a bank or financial institution provides you with a personal loan, you don’t need to put anything up for collateral.
But personal loans have their disadvantages. Because the lender can’t take possession of your vehicle if you don’t make the payments, the requirements for securing personal loans are often strict. Applicants must meet rigorous credit scores and income standards to be considered, and interest rates tend to be higher.
Alternatively, lenders offer private party auto loans specifically for purchasing a used vehicle. When you get one of these loans, your car is put up for collateral. This allows the lender to be more lenient with its requirements. But income and credit scores still play prominent roles in the application process.
Because the vehicle serves as collateral, rates for private party auto loans tend to be lower than those of personal loans. But you will have to provide proof of employment or income and various documentation verifying the validity of the vehicle.
Things To Consider When Looking for the Best Private Party Auto Loan
So, how does a private party auto loan work? While the process is pretty straightforward, there are a few things to prepare for before applying. You must evaluate your budget, select your car options, and seek out possible loan lenders.
Determine Your Budget
The first step you should take when considering a private party auto loan is determining your budget. Having a realistic budget will give you an idea of how much you can afford. Remember that when purchasing a vehicle, there are financial obligations beyond the price of the car. You should also factor vehicle registration, insurance, and maintenance into your budget.
Once you figure out how much money you need to borrow, it’s time to calculate your monthly payments. There are many loan calculators available online for this purpose. Assess the length of your loan, interest rate, and total loan amount to estimate how much you will be expected to pay each month.
If the numbers aren’t working in your favor, there are options. You could opt for a more extended loan period, which will increase your interest payments. Alternatively, putting more money down will lower your payments. The purpose of determining your budget is to ensure that you get a loan with terms you’re comfortable with.
Narrow Down Your Car Options Ahead of Time
The car you choose affects the overall price of your private party auto loan significantly. Because the vehicle will be collateral for the loan, its value must be appropriate for the amount you wish to take out. A car’s value is determined by its age, condition, and mileage.
Most lenders will require you to choose a specific car before you complete the application process. Others will preapprove you before you select the vehicle. But suppose you don’t decide on a car beforehand. In that case, you won’t know the terms of the loan agreement until that detail is finalized.
Compare Private Party Auto Lenders
The internet is a great place to start when you’re ready to compare lenders. Applying for preapproval can give you a solid idea of what you can expect regarding the amount and terms of a loan. Most financial institutions will have an online application and preapproval process, so you can complete all steps from home.
There are a few points to weigh when comparing lenders for a private party auto loan. A lender’s annual percentage rate (APR) refers to the interest that’s generated yearly. A higher APR equals higher monthly payments.
It’s always wise to read the fine print carefully. Nearly all banks and financial institutions will charge a fee for late payments. This fee will vary from lender to lender, so consider this detail when choosing your finance options.
Some lenders will charge a fee if you pay your loan off early. This is called a prepayment penalty. While prepaying may seem reasonable from the borrower’s point of view, it’s the opposite for the lender. When a borrower pays down their principal early, the bank loses out on the interest payments they would have received from a longer-term loan.
Private Party Car Loans Eligibility Factors
The criteria lenders use to determine eligibility will differ from one financial institution to the next. But some factors have more significance than others, regardless of which lender you choose. These include your credit score, income, age, loan terms, and selected vehicle.
Credit Score
Your credit score carries a lot of weight when securing a private party auto loan. The most competitive loan rates are put aside for applicants with higher credit scores. While it’s not impossible to be eligible for a loan when you have a lower score, it can greatly affect your APR.
Your credit history can also be taken into consideration. Your credit history dives deeper into your credit by telling lenders how much of your credit you currently use and how much you’re paying off monthly. This information will give them a good idea of whether you’re a good candidate for a loan.
Conducting a credit score and history check yourself before you begin the application process is a good idea. Doing so can help determine how your score might impact your loan terms and interest rate.
Income
How much money you make per year is a critical factor that financial institutions consider. Lenders will look to your annual income to determine your eligibility, loan terms, and APR.
Some lenders will require that you make a certain amount of money to be considered. When you’re shopping around for a lender, be sure to research their minimum income requirements.
Age
Anyone 18 or older may apply for a loan with many lenders, but a younger person may encounter some roadblocks. Establishing a substantial credit history or annual income in such a short time can be challenging. A cosigner may be prudent in these cases. If you’re under 21, check the lender’s minimum age requirements to ensure you qualify.
Regarding maximum age requirements, lenders will likely not use this information as a determining factor during the application process. But they may look at your age in conjunction with other information you provide in making their decision. For example, if you’re close to retirement age, the lender may evaluate any retirement income you may receive.
Term Length
A more extended loan period means lower monthly payments but, in most cases, a higher interest rate. Although you will pay less each month, you will pay more over time by increasing your term length. Working with your budget, determine a term length that works best for your needs.
Your credit score will also affect the term limits that are available to you. A lower score typically means the longest loan terms are not available because lenders want to reduce their risk.
Vehicle Age
Typically, the older a vehicle is, the more challenging it is to finance. This is because older cars present more risk to the lender. In older vehicles, maintenance and repair costs increase, and resale values decrease. If your lender does accept an older car as collateral, they may raise your interest rate.
Vehicle Value
Lenders use a loan-to-value (LTV) ratio when estimating loan terms and eligibility. Your LTV ratio is a percentage calculated by dividing the loan amount by the vehicle’s cash value. Typically, lenders want an LTV ratio of 100% or less. Anything higher than that will require a better credit score or higher interest rates.
There are online tools that can help with determining the cash value of your vehicle. Edmunds is one example.
Vehicle Title
Most financial institutions will require a copy of the vehicle’s title for the duration of the loan. The title provides proof of ownership and includes information like the VIN, make, model, and vehicle year.
A clean title means the car does not have large, recorded issues. Some such items include frame damage, lemon law vehicles and total losses. If a car does not have a clean title, some financing sources won’t offer a loan and others will reduce the amount of the loan they approve.
