With many financing options available to make a vehicle purchase possible, it is important to understand the specifics of each choice. A private loan – financing for those buying from a private owner – may be easier to obtain than traditional loans.
What is a car loan between individuals?
A car loan between individuals allows you to finance a vehicle that you buy from an individual.
“Millions of retail vehicle sales occur each year, typically at lower transaction prices than would normally occur at a dealership,” says Strati Papageorge, senior vice president of automotive product management for PNC Bank. .
“These vehicles are typically older and have higher mileage, and offering financing to consumers who wish to purchase such vehicles gives them flexibility and options they might not otherwise have.”
Auto loans to individuals have some disadvantages, however. For example, they are not as widely available as loans for the purchase of new vehicles. And often they charge higher rates.
“Due to the nature of private party sales, prices tend to be higher than what you would see if you went to a dealership,” says Papageorge. “But the trade-off for customers is usually a lower vehicle price, so they can still have an affordable payment.”
There are ways to alleviate the inconvenience associated with peer-to-peer auto loans and find a lender who will offer auto loan you can afford.
How a car loan between individuals works
To successfully get the best private party auto loan, you need to follow a few steps.
Create a budget
The first step, as with most financial endeavors, begins with creating a budget. The key to understanding your budget is knowing your credit history and score before you even find a lender. By checking your credit, you will have a good idea of what interest rate and loan amounts you may be eligible for. Once you know your credit status, it will be easier to budget and decide how much you can pay out of pocket and how much you will need to finance.
Choose a vehicle and compare lenders
After establishing your budget, find out what type of vehicle you want. Know the type, age and mileage of the car you want before approaching a lender. This will determine the type of loan you qualify for. Once you know which vehicle you plan to buy, compare the prices and consult with a few potential lenders to find the loan products that best suit your needs. Compare interest rates, loan terms, monthly payments, fees and penalties.
Finalize the deal
Once you’ve found a private car loan that’s right for you, qualify, and signed the loan agreement, the lender will send a check to you, either to you or directly to the seller of the vehicle. The lender can even deposit the funds directly into your account. This may take a few days, so let the seller know.
The state in which the transaction takes place determines what must be done to legally transfer ownership to you. This can be found on your state’s Department of Motor Vehicles website and should be reviewed before sending the funds.
Start making payments
Now that you have accepted the loan, organize your future payments. Many private auto lenders offer the option of setting up automatic payment or making payments through an online portal. It’s a great way to make sure you pay on time, so be sure to discuss your options with your lender to avoid missing payments.
4 reasons to consider a private loan
Although personal auto loans may charge higher rates than standard auto loans, there are some advantages:
- There are better vehicle offers: Private lien holders’ selling prices tend to be lower than car dealerships. With a private car loan, you get financing like you would at a dealership, plus the savings a private seller is likely to offer.
- It can be cheaper than a personal loan: A personal loan is likely to be more expensive because it is unsecured. A lender assumes more risk when there is no collateral to secure the loan if the borrower defaults.
- They offer flexibility: Rather than being limited to what a dealership offers, you can get the vehicle you want affordably from a private owner.
- There are loan options for bad credit: Even those with poor credit might be eligible for private auto loans. However, as with all loans offered to borrowers with bad credit, they come with higher interest rates, monthly payments, and a higher overall cost.
Where to find car loans between individuals
Lending products vary from financial institution to financial institution, so not all lenders offer car loans to individuals. But you can get a private car loan from most major financial institutions, community banks, local credit unions, and online lenders. Some lenders may require the vehicle to meet certain criteria. For example, they may require the car to be less than 10 years old with less than 120,000 miles in order to consider the buyer for a loan.
Other lenders may have a minimum loan amount. If the vehicle you want is $6,000, but the lender doesn’t offer such small loans, you’ll need to find another lender. Carefully review the lender’s criteria before applying for a car loan from a private party to avoid damaging your credit for a loan you don’t qualify for.
How to apply for a car loan between individuals
Once you’ve found the vehicle you want to buy from a private owner, be prepared to provide the lender with basic personal information, including:
- Your full name, date of birth, address, social security number and contact information.
- Employment and income information.
- Current debt securities, such as a mortgage.
You should also have certain documents and details on hand regarding the vehicle you wish to purchase, including:
- Make and model, model year and mileage.
- The vehicle identification number, or VIN.
- Deed of sale which details the purchase contract.
- Copy of vehicle registration.
- Copy of vehicle title.
- A written payment estimate from the seller’s lender, if applicable.
Lenders have different requirements for the borrower and the car that will secure the loan. You should be able to find out what these requirements are before you apply.
If your credit is not good, consider delaying the purchase until you improve your credit score. Waiting a few months won’t turn your credit from bad to perfect, but it can make enough of a difference to save you money on the interest rate and monthly payments.
Alternatives to car loans between individuals
If you haven’t received approval or can’t find a private car loan that matches the car you want to buy, there are still alternatives you can research to buy through a private seller. . The best alternative to a car loan between individuals would be a Personal loan. With unsecured personal loans, the lender considers your income and credit score to determine loan eligibility.
This may be a good option if:
- The vehicle you want to buy is too old or has too many kilometres.
- The vehicle is purchased with a salvage title. A salvage title is issued when a vehicle has already been declared a “total loss” due to major damage.
- The minimum loan amount is more than you want to borrow.
Although a personal loan can give you the flexibility to buy the vehicle you want, it will likely carry a higher interest rate than a private car loan and could end up costing you more.
The bottom line
Peer-to-peer auto loans are a great option for financing a new vehicle. These loans can save you money because they are unsecured and are cheaper and offer much more flexibility than other loan options. Take the time to do your homework before signing a private loan to understand the pros and cons.