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Demand for used cars is high and supply is limited. With fewer options available and the average used car priced at $24,815, buying a used car from a private party may help you get the vehicle you want for less. But what if you don't have enough cash to pay the seller? Fortunately, you can get a loan to buy a car from a private party. Here are some options to consider.
Private Seller Pros and Cons
Buying a used car from a private party can have some valuable benefits compared with buying from a dealership. It might be the only way to get the exact car you want, especially if you're looking for a unique, discontinued or hard-to-find model. Individuals may be less likely to mark up the purchase price than a dealership would; often, car owners simply want to get rid of the vehicle. Finally, dealing with an individual can give you more leeway to haggle over the price of the car.
Unlike a dealership, however, a private seller won't have a finance department on hand to offer you a loan. Since a private seller must get paid in full before you take possession of the car, you'll need to do some legwork on your own to find financing.
What Are Your Options for Private Party Financing?
The most common ways to finance a private party auto purchase are by using a personal loan or a private party auto loan. Both types of loans are available from banks, credit unions, online lenders and other financial institutions. Which is the most cost-effective option?
A private party auto loan uses the car itself as collateral to secure the loan, so the lender can repossess the car if you don't pay. As a result, private party auto loans generally have lower interest rates than personal loans and may be easier to get if your credit is less than stellar.
Personal loans are typically unsecured loans, which don't require collateral. Unsecured loans are riskier for lenders, so they typically have higher interest rates than secured loans. Interest rates on personal loans have a wide range but can reach 35% or more. Experian's personal loan calculator can estimate your loan payments for various amounts and interest rates.
Although a private party auto loan usually costs less than a personal loan, the interest rate for a private party auto loan can vary widely depending on your credit score. The average interest rate for a used car loan was 8.66% in the second quarter of 2021, according to Experian's State of the Automotive Finance Market. Lenders with excellent credit paid an average interest rate of just 3.66%, while those with poor credit paid an average of 20.58%.
How to Get a Private Party Auto Loan
Before seeking a private party auto loan, check your credit report and credit score. A good credit score can help you qualify for better loan terms. If your credit is fair or poor, try to improve it before applying for an auto loan.
You can get private party auto loans from banks, credit unions and online lenders. Start with your existing bank or credit union; then shop around to find the best offer. Bank of America, PNC, LightStream and MyAutoLoan are popular sources of private party auto loans.
In addition to your personal information such as employment and income, applying for a private party auto loan requires information about the specific car you want to buy. This may vary depending on your state laws, but typically includes the vehicle identification number (VIN); a copy of the vehicle registration and title; a bill of sale listing the details of the purchase; and (if the seller has an outstanding auto loan) a payoff quote from the current lender.
The age and price of the car you're financing, the amount you're borrowing and the length of the loan can all affect the amount you'll pay for the loan. For instance, older cars are less valuable as collateral, so you'll generally pay higher interest rates to finance them. Shorter loan terms generally translate to lower interest rates. Some lenders have criteria limiting the age or mileage of vehicles they'll finance or won't issue loans for less than a certain amount.
When you apply for an auto loan, the lender will conduct a hard inquiry into your credit, which can temporarily lower your credit score. While one hard inquiry isn't likely to have much impact, many applications for credit in a short period of time can temporarily lower your score. Thankfully, most newer credit scoring models count multiple applications for the same type of loan made within a certain period of time as one, allowing you to shop around for the best rate for your loan.
Once you've been preapproved for several loans, use Experian's car payment calculator to estimate your monthly payment and the total interest you'll pay for each of the options. Review your budget to see what payment you can afford.
When comparing loans, keep in mind that the interest rate on a loan isn't the same as the annual percentage rate (APR). The interest rate expresses the amount you'll pay to borrow money; the APR includes the interest rate as well as any loan fees. Comparing APRs of different loans is the best way to determine which one costs the least. A loan with a higher APR will cost more over its lifetime than one with a lower APR, even if the monthly payments for the two loans are identical.
Loan Options to Avoid
When considering how to finance your used car purchase, steer clear of the following high-risk loans.
- Credit card cash advances: Some credit cards let you borrow cash at ATMs and pay it back later. But credit card companies usually charge higher interest rates on cash advances than on purchases, making this a costly way to pay for your new ride.
- Payday loans: These loans may seem appealing because they don't require credit checks, but generally must be repaid or renewed in a few weeks. With APRs upwards of 400%, payday loans can lead to a cycle of debt that's difficult to escape.
- Home equity loan or home equity line of credit (HELOC): Both types of loans use the equity in your home as collateral. If you can't repay the loan, the lender could foreclose on your house. That's a big risk to take to get a used car.
Get the Car You Want With the Right Loan
Once your private party auto loan is approved, the lender will either send funds to you or your bank, pay the seller or their bank, or pay the seller's lienholder (if the seller has an auto loan to pay off). Then it's up to you to pay off the loan. Making your private party auto loan payments on time can help improve your credit score—and that can make it easier to get approved for a loan the next time you buy a car.