5 Lenders That Offer Private-Party Auto Loans

How do private-party auto loans work?

For the most part, applying for a private-party auto loan is the same as for any other type of auto loan. While the loan is similar, the transaction itself is not: You as the buyer will do much of the work a dealer would otherwise do.

1. You won’t have a dealership to handle financing and related paperwork. When you buy from a dealer, a finance officer will typically arrange your financing or work with your lender to finalize the loan paperwork. When you buy from an individual, you will find your own loan and work directly with the lender.

2. You (or your lender) will have to pay off any existing liens on the car. If an individual is still paying on a car’s loan, that car can’t be sold until the loan is paid off and the lender releases the car’s title. When you buy a used car from a dealer, any payoff of a previous loan and title transfer is handled for you. When you buy from a private seller, your lender may assist with paying off a previous loan, but it is still your responsibility to ensure this is done.

3. You will have to provide vehicle documentation to your lender. Again, a dealer normally handles this aspect of the car-buying process. When you get a private-party auto loan, your lender will ask you to provide information such as the following (depending on your state’s requirements).

   • Vehicle identification number, or VIN.

   • Car year, make, model and mileage.

   • Copy of the vehicle registration and title or title status.

   • Whether the car has an existing lien and the amount to pay if off.

   • A bill of sale listing the details of the purchase, sale price, date of sale and names/addresses of the buyer and seller.

4. You may need to know the exact car you are buying before you apply. When comparing lenders, be aware that some will require you to know the exact car you want to purchase before you apply. Other lenders are willing to preapprove a private-party auto loan before you’ve selected a vehicle. But you won’t know the exact terms of your loan until you have information about the car and the final amount you need to borrow.

5. You will have to handle the transfer of ownership. Even after you have your private-party loan lined up, your work isn’t complete. Many steps that a dealer would typically manage, such as registering the vehicle and completing the title transfer with the Department of Motor Vehicles, will be up to you. You will also be responsible for paying any sales tax and fees when registering the car. And some states require a bill of sale along with an odometer disclosure statement. Check with your state’s DMV to determine the requirements.

6. Private-party auto loans tend to have higher rates. As with any other auto loan, the rate you receive for a private-party auto loan depends on your credit history and credit score. But private-party auto loans usually have a higher rate when compared with other used auto purchase loans. That’s because a lender takes on greater risk when making a private-party auto loan, so the higher rate is to compensate for that risk.

7. You can avoid dealer add-ons and fees. One of the advantages of buying from a private seller is the likelihood of paying less for the car than you would at a dealership. But car price isn’t the only way to save. When buying from an individual, you won’t be subjected to heavy sales pitches for add-ons, such as warranties. You also won’t run the risk of having extra services and fees added to the overall cost of the car without your knowledge.

>> MORE: What is a private-party auto loan?

If you can’t find a private-party auto loan

Without a private-party auto loan, your options to pay for a privately purchased car are somewhat limited.

You could use a personal loan. Some lenders that advertise private-party auto loans, like LightStream, are actually promoting unsecured, personal loans. Since personal loans don’t use your vehicle as collateral, loan approval depends more heavily on your credit history and income, meaning they are more challenging to get. Also, personal loan rates are usually higher than private-party auto loan rates.

You could also pay from your own savings — with cash, a cashier’s check or money order. Some sellers won’t accept cashier’s checks due to the potential for fraud, or they may want to meet at your bank to ensure the check isn’t forged. If you do pay with cash, it’s a good idea to get a bill of sale with the agreed-upon purchase price as proof of payment.

To protect yourself, consider using an escrow account service when paying. Your payment for the car will go into an escrow account for safekeeping, and the money isn’t released to the seller until you have the car’s title. Make sure to choose the escrow company yourself, since scam artists have been known to use fake escrow accounts.

>> MORE: Tips for buying a used car from a private seller

Why many lenders don’t offer private-party auto loans

When lenders make an auto loan, they want the assurance that a car’s value will enable them to recoup any loss if the borrower defaults on the loan. In other words, the lender can repossess a car and sell it for enough to pay the outstanding loan balance.

Lenders take on greater risk when financing a car purchased from an individual as compared with a dealership. Dealerships operate under state and local laws that protect consumers. The used cars they sell have typically passed an inspection and come with some type of warranty. Dealers also have more experience in detecting issues like odometer tampering or stolen vehicles that have been retitled. These same protections aren’t in place when a car is purchased from an individual.

Also, dealers handle nearly all of the paperwork for car buyers, making the process easier for lenders. When lenders work directly with a car buyer who may not be familiar with paying off an existing lien or transferring a title, it can result in a slower process and more work for the lender.