
If you're considering buying a car with third party financing, there are several options available to you. You can explore dealerships that offer financing through third-party lenders, such as banks or credit unions.
Dealerships often have relationships with multiple lenders, which can increase your chances of approval. Some dealerships may also offer special financing programs for specific types of vehicles or buyers.
Before you start shopping, it's essential to have a clear understanding of your budget and credit score. This will help you determine how much you can afford to spend on a car and which financing options are available to you.
With a solid understanding of your financial situation, you can begin researching and comparing third-party financing options.
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Types of Private Loans
Private-party auto loans are secured loans that use the car as collateral, allowing lenders to repossess the vehicle if you default on the loan.
Private-party auto loans have annual percentage rates and fixed loan terms that affect your monthly payment, typically ranging from 12 to 84 months.
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Interest rates on private-party auto loans can vary based on your credit, state of residence, loan amount, loan term, and discounts, and may also factor in the age of the car.
Some lenders have restrictions on the vehicles they'll finance, such as age or mileage, and may charge higher interest rates on older vehicles or those with a lot of miles.
There are two main types of private loans for car purchases: private-party auto loans and personal loans.
Private-party auto loans are generally more cost-effective, with lower interest rates and more lenient credit requirements, but may have restrictions on the vehicle's age or mileage.
Personal loans, on the other hand, are unsecured loans with higher interest rates, typically ranging from 8.66% to 35% or more, and are riskier for lenders.
Private-party auto loans can be obtained from banks, credit unions, online lenders, and other financial institutions, and may offer a complimentary vehicle history report to ensure the vehicle is not a salvaged title.
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Understanding Private Loans
Private-party auto loans are a type of loan that allows you to purchase a vehicle from a private seller, not a dealership.
Not all big banks offer these loans, but some do, such as those mentioned in Example 1. Private-party loans are similar to other auto loans because they're secured loans, with the car serving as collateral, just like with typical auto loans.
Interest rates can vary based on your credit, state of residence, loan amount, loan term, and any discounts, like an autopay or customer discount. Private-party auto loan APRs are typically higher than the interest rates for used cars you'd buy at a dealership.
Some lenders may have restrictions on the vehicle's age or mileage to qualify for a private-party loan, so be sure to check with your lender. A complimentary vehicle history report can be provided to ensure the vehicle is not a salvaged title and has not been in any major accidents.
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Private-party auto loans can be helpful because they broaden a car buyer's vehicle options beyond what's available at a dealership. However, some lenders may have higher rates or shorter loan periods compared to a traditional auto loan from a dealership.
It's essential to speak with multiple lenders to ensure you're receiving the most competitive rate and term possible for your private-party auto loan. This will help you make an informed decision and avoid higher interest rates or unfavorable loan terms.
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Comparing Options
Consider more than just the monthly payment when reviewing offers, as factors like loan term, APR, fees, and penalties can affect how much you pay over the life of the loan.
A longer loan term may result in lower monthly payments, but you'll likely end up paying more in total loan interest.
You can minimize the negative effect on your credit by applying for multiple preapprovals within the same time period, which may only affect your scores minimally.
An online auto loan calculator can help you run the numbers and compare offers from multiple lenders.
Personal loans often have higher interest rates, but a private-party loan may be the less expensive option with an average interest rate of 11.93% for used cars.
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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.
A longer loan term could result in lower monthly payments, but you'll likely end up paying more in total loan interest.
To help minimize some of the negative effect to your credit while comparing offers, apply for multiple preapprovals within the same time period.
Multiple hard inquiries could affect your scores more heavily.
Should I Get a Private-Party or Personal Loan?
If you're considering buying a used car from a private seller, you'll want to weigh your options carefully. A private-party auto loan may be the less expensive option, with average used-car interest rates as low as 11.93% in the fourth quarter of 2023, according to Experian.
However, personal loans often have higher interest rates, ranging from around 4% to 36% or more, and are usually unsecured. This means they're not backed by collateral, like a car.
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Private-party auto loans can be a more affordable choice, especially if you're buying a vintage vehicle or a project car that doesn't meet most lenders' guidelines. But be aware that these loans may have shorter payback times, requiring you to pay back the loan in as little as 12 months.
It's worth noting that private-party auto loans can be harder to find, and you may need to shop around to find a lender that offers them. On the other hand, personal loans are often more widely available, but may come with higher interest rates and shorter loan terms.
Avoid Long-Term Loans
A 60-month loan may keep monthly payments low, but you'll pay more in interest over time and probably also pay a higher rate.
Using a recent example from Navy Federal Credit Union, financing $23,000 at 5.44 percent over 36 months would result in a total of $24,980.
A 60-month loan, on the other hand, would incur a higher 5.74 percent rate and an overall payment $1,500 higher than the shorter-term loan.
Choosing the shortest loan term you can afford will minimize interest payments and reduce the likelihood that you'll find yourself "upside down", or owing more on the loan than the car is worth.
Private-party loans, like other auto loans, have fixed loan terms that affect your monthly payment.
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Advantages and Disadvantages of Private Party Loans
Private party loans can broaden a car buyer's vehicle options beyond what's available at a dealership.
One of the main advantages of private party loans is that they offer more flexibility in terms of the vehicles available for purchase.
Some lenders may have restrictions on the vehicle's age or mileage to qualify for a private party loan.
You should check with your lender to see if they can provide a complimentary vehicle history report to ensure the vehicle is not a salvaged title and has not been in any major accidents.
Private party loans may have higher rates compared to traditional auto loans from a dealership.
A shorter loan period is another potential disadvantage of private party loans.
Speaking with multiple lenders can help you find the most competitive rate and term possible for your private party loan.
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Applying for a Private-Party Loan
To apply for a private-party loan, you'll need to fill out an application with the lender, providing information about the car, such as the VIN, make, model, and mileage, as well as personal info like your Social Security number and employment history.
You'll also need to check your credit report and score before applying, as 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.
The lender will review your application, credit, and loan terms, and you may need to provide additional documents, such as vehicle registration, title, and bill of sale.
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Applying for a Private-Party 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 lender will review this information, along with your credit, to determine whether you qualify and what the loan interest rate and terms will be.
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The information you need to provide will vary by lender, so it's essential to check with your chosen lender to see what specific requirements they have. 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.
Here's a list of typical documents you may need to provide:
- Vehicle identification number (VIN)
- Make and model
- Model year and mileage
- Vehicle registration
- Vehicle title
- Bill of sale
- Payoff quote (if applicable)
Once you've chosen a loan, the lender will review your application and provide you with a decision. If approved, you can shop for and coordinate a purchase amount with a private seller. You'll need to provide some vehicle details and possibly have the vehicle inspected with your lender to finalize the funding of your loan.
Maximize Down Payment
Maximizing your down payment is a crucial step when applying for a private-party loan. Putting as much money down as you can comfortably afford will minimize the amount of money you lose to interest payments.
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The more you pay upfront, the less you'll pay in interest over time. For example, if you put $3,000 down on a $29,000 car, you'll pay a total of $29,769 on a 48-month, 6.8 percent APR loan.
You'll save nearly $300 over the life of the loan by making a larger down payment. This is especially true if you compare how much interest your money would make in a savings account – it's probably less than what you would save by making a larger down payment.
A $5,000 down payment, for instance, will save you money in the long run and lower your monthly payments.
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Private Party Financing
Private party financing can be a great option if you're looking to buy a car from a private seller. You can get private party auto loans from banks, credit unions, and online lenders, including popular sources like Bank of America and LightStream.
Private party loans are secured loans, meaning the car serves as collateral, and lenders can repossess the vehicle if you default on the loan. This can make private party loans more attractive to lenders, resulting in lower interest rates compared to personal loans.
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The most common ways to finance a private party auto purchase are through a personal loan or a private party auto loan. Private party loans generally have lower interest rates than personal loans and may be easier to get if your credit is less than stellar.
You can expect to pay an average interest rate of 8.66% for a used car loan, according to Experian's State of the Automotive Finance Market. However, lenders with excellent credit can qualify for rates as low as 3.66%, while those with poor credit may pay an average of 20.58%.
To get a private party auto loan, you'll need to provide personal and vehicle information, including the vehicle identification number, a copy of the vehicle registration and title, and a bill of sale listing the details of the purchase. The lender will also conduct a hard inquiry into your credit, which can temporarily lower your credit score.
Private party loans can be customized to fit your needs, with loan terms ranging from 12 to 84 months. The age and price of the car, the amount you're borrowing, and the loan term can all affect the amount you'll pay for the loan.
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Personal Loan Options
Personal loans can be a viable option for buying a car from a private party, especially if you're looking to purchase a vehicle that's older or has more miles on it than most lenders' guidelines.
A personal loan is typically an unsecured loan, meaning it's not backed by collateral, which can result in higher interest rates, often ranging from 4% to 36% or more.
You can use a personal loan calculator, such as Experian's, to estimate your loan payments for various amounts and interest rates.
One lender that offers personal loans for buying a car from a private party is U.S. Bank, which allows borrowers to use an unsecured personal loan to buy a car without putting their car at risk by using it as collateral.
Their personal loans have competitive rates, making them a good option for those who need an unsecured loan to finance their car purchase.
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Good for Competitive Rates: Lightstream
Lightstream offers competitive rates on its private-party auto loans. To get the lowest rate possible, you must set up autopay and have excellent credit.
Lightstream can fund your loan on the same day you apply, though the accessibility of your funds may depend on your bank. This can be a big advantage if you need the money quickly.
Having excellent credit is key to getting the best rates with Lightstream. If your credit is fair or poor, you may want to try to improve it before applying for a loan.
You can shop around and compare rates from different lenders, including Lightstream, to find the best option for your needs.
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Personal Loan Options
Personal loans can be a good option for buying a car from a private party, especially if you're looking for a vintage vehicle or a project car.
Personal loans are typically unsecured loans, which means they don't require collateral. This makes them riskier for lenders, resulting in higher interest rates.
Interest rates on personal loans can range from around 4% to 36% or more, according to Experian. In contrast, average used-car interest rates in the fourth quarter of 2023 had an average interest rate of 11.93%.
Personal loans often have shorter loan terms, requiring payback times in as little as 12 months. This can be a drawback, especially if you're not ready to pay off the loan quickly.
U.S. Bank allows borrowers to use an unsecured personal loan to buy a car from a private party. This option isn't a traditional auto loan, but U.S. Bank personal loans have competitive rates.
Keep in mind that personal loans are generally more expensive than private-party auto loans, which use the car itself as collateral to secure the loan.
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Getting Your Desired Car
Once your private party auto loan is approved, the lender will send funds to you or your bank, pay the seller or their bank, or pay the seller's lienholder.
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The funds will be used to pay off the seller's loan, if they have one. This means you can get the car you want without having to worry about the seller's financial situation.
Making your private party auto loan payments on time can help improve your credit score. This is a good thing, as a good credit score can make it easier to get approved for a loan the next time you buy a car.
You can review your FICO Score from Experian for free and see what's helping and hurting your score. No credit card is required to do this.
The average personal loan balance grows by 6.3% in 2023, which is something to keep in mind when considering your loan options.
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Frequently Asked Questions
Is it better to finance a car through a bank or through the dealer?
Financing through a bank is often a better option, as they can offer more competitive interest rates than dealerships. This is because dealerships typically add a markup to the interest rate when connecting you with a lender
Sources
- https://www.creditkarma.com/auto/i/private-party-auto-loan
- https://www.experian.com/blogs/ask-experian/what-is-private-party-auto-loan-and-how-to-get-one/
- https://www.consumerreports.org/money/car-financing/how-to-finance-a-used-car-a7337825677/
- https://money.stackexchange.com/questions/74467/loan-for-car-buy-cash-third-party-or-bank-loan
- https://www.m1cu.org/news/articles/private-party-auto-loans-what-how-and-why
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