What is a private-party auto loan?

Smiling young couple with cell phone at carImage: Smiling young couple with cell phone at car

In a Nutshell

If you want to buy a car from a private seller but don’t have the money on hand, a private-party auto loan could help you fund the purchase. Like other types of auto loans, private-party car loans are offered by some banks, credit unions and online lenders. But beware — private-party auto loans tend to have higher interest rates than traditional auto loans.
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A private-party auto loan is one way to get the cash you need to buy a vehicle from a private seller.

Buying a used car from a private seller could help you save money. For example, sales prices tend to be lower through private sellers than dealerships.

But private parties don’t offer financing (and you should be very careful if they do). And that’s where a private-party auto loan can come in. With a private-party loan, you get the perk of financing as if you were buying from a dealer, while getting the savings that a private seller may have to offer.

How do private-party auto loans work?

Private-party loans are similar to other auto loans because they’re typically secured loans, with the car serving as collateral. So just like with typical auto loans, if you default on the loan, the lender can repossess the vehicle.

And also like other auto loans, private-party loans have an annual percentage rate and fixed loan term that affect your monthly payment. Depending on the lender, private-party loan terms typically range from 12 to 84 months.

Interest rates can also vary based on your credit and state of residence as well as the loan amount, loan term and any discounts, like an autopay or customer discount. The lender may also factor in the age of the car you want to purchase.

Private-party auto loan APRs are typically higher than the interest rates for used cars you’d buy at a dealership.

What’s the minimum credit score needed for an auto loan?

How do I get a private-party auto loan?

Private-party loans are offered by some large financial institutions, like Bank of America, as well as some smaller, regional banks, credit unions and online lenders. Keep in mind that some lenders have restrictions on vehicles they’ll finance, like age or mileage — or they may charge a higher interest rate on older vehicles or those with a lot of miles.

Compare offers

It’s always a good idea to get quotes from multiple lenders and compare them to find the best offer for you. Consider more than the monthly payment when reviewing offers — factors like loan term, APR, fees and penalties (including prepayment penalties) can affect how much you pay over the life of the loan. For example, a longer loan term could result in lower monthly payments, but you’ll likely end up paying more in total loan interest. An online auto loan calculator can help you run the numbers.

While you shop around for a private-party loan, you may want to apply to get preapproved for a car loan. Preapprovals can trigger a hard credit inquiry, which could lower your credit scores by a few points. Multiple hard inquiries could affect your scores more heavily. To help minimize some of the negative effect to your credit while comparing offers, apply for multiple preapprovals within the same time period. Depending on the credit-scoring model, multiple inquiries that fall within a 14- to 45-day window might count as one inquiry, which may only affect your scores minimally. 

How to apply for a private-party auto loan

To formally apply for a private-party loan, you’ll need to fill out an application with the lender you choose. You’ll be asked to provide some information about the car, which may include the vehicle identification number (or VIN), make and model, model year and mileage. You’ll also be asked for personal information, which could include your Social Security number, address, employment and income. The information you need to provide will vary by lender.

The lender will review this information, along with your credit, to determine whether you qualify and what the loan interest rate and terms will be.

Once you’ve chosen a loan, you may need to provide additional information and documents to your lender, like the vehicle registration, vehicle title, bill of sale and a payoff quote.

Depending on the lender, you may get a check for the agreed-upon sale amount that’s made out to the seller or the lienholder (if it isn’t the seller), or the loan amount might be deposited into your bank account after the loan closing.

What banks offer private-party auto loans?

Not all big banks offer these loans. For example, Capital One and Chase don’t offer private-party auto loans. Here are a few banks that do.

Good for competitive rates: Lightstream

Lightstream’s private-party auto loans feature competitive rates. On top of that, if you’re approved for a lower rate with another lender, Lightstream promises to beat that rate by 0.1 percentage points if certain conditions are met. To get the lowest rate possible with Lightstream, you must set up autopay and have excellent credit.

Read our review of Lightstream auto loans to learn more.

Good for one-on-one support: PNC Bank

If you prefer a personalized experience over applying online, PNC could be a good fit for you. To apply for an auto loan from PNC, you must visit a branch in person. If you live in one of the states where PNC operates, you may also be able to take advantage of its competitive rates on private-party auto loans.

Learn more about PNC Bank’s auto loans in our review.

Good for Bank of America loyalists: Bank of America

Preferred Rewards members (who must have $20,000 or more in combined eligible Bank of America accounts) may qualify for a rate discount of up to 0.5%. Additionally, you can apply online for a Bank of America auto loan before you’ve chosen a car — and lock in your rate for 30 days while you’re shopping around. If you’re still figuring out your budget, this can help you decide how much you can afford.

Read our review of Bank of America auto loans.

Should I get a private-party auto loan or personal loan?

An unsecured personal loan may be an alternative to a private-party auto loan, but a private-party loan may be the less expensive option. Unsecured personal loans often have higher interest rates because the loan isn’t backed by collateral, like a car.

While a personal-loan interest rate can range from around 4% to 36% or more, a report from credit bureau Experian showed that average used-car interest rates in the fourth quarter of 2020 ranged from 3.8% to 20.3%.

Next steps

When you want to buy a car from a private seller and don’t have the cash, a private-party auto loan might be your best option.

Just remember to account for the higher APR that typically comes with a private-party auto loan when determining your used-car budget. To learn more about auto loans and all their moving parts, check out our guide to understanding a car loan.

About the author: Liz Knueven is a personal finance writer with a BFA in writing from Savannah College of Art and Design. Liz has been published by Business Insider, Carfax.com and LendingTree. Read more.