How To Finance a Car From a Private Seller

You did your research to find exactly the kind of car you want to buy. Now, how do you pay for it when a person, not a dealership, is selling it?

"Most BECU members start with getting loan preapproval," said Lisa Dela Cruz-Kahoano, BECU consumer loans department manager. "Preapproval gives peace of mind and allows you to take time when shopping. You have 30 days to find the vehicle you want versus settling."

The process of buying a vehicle from a private seller is different from buying a vehicle from a dealership. Here are the ins and outs of financing a vehicle purchase with a private-party auto loan.

Takeaways: What To Know About Private-Party Auto Loans

• A private-party auto loan helps you finance a vehicle sold by an individual, not a dealership.
• Financing a private-party auto loan comes with its own set of requirements and process steps, but it could save you money in the long run over financing through a dealership.
• Getting preapproved for a private-party auto loan before car shopping could help you stay on track with your purchase timeline.

Example of a Private-Party Auto Loan Process

At BECU, private party auto loans are called "BECU title transfer," said Dela Cruz-Kahoano, where BECU helps transfer the car's title to the new owner.

The buyer and seller make an appointment at a BECU location to ask questions, process and sign documents, and then BECU gives a check to the seller for the car's purchase.

Dela Cruz-Kahoano recommended making an appointment to save time and ensure all documents are in order and prepared for signing.

If the seller's financial institution still owns the car being sold, BECU sends payment to the lienholder (the bank or credit union, for example) to pay off the seller's existing auto loan.

For example, say you are shopping for a used 2022 Subaru Outback. You check prices on Facebook Marketplace and Craigslist. You also look up the vehicle in Kelley Blue Book, which lists the current resale value of a 2022 Outback at $21,701.

Now that you know what type of vehicle you're looking for and the estimated purchase price, you can take that information to a financial institution to estimate your monthly payments.

Using BECU's Auto Loan Calculator, you estimate the cost with the following information, including the latest interest rates:

Vehicle condition: Used

Purchase price: $21,701

Down payment: $2,000

Loan term (months): 48

Interest rate: 6.74% as of Oct. 4, 2024

Estimated monthly payment: $469

Total loan amount: $19,701

Total interest paid: $2,830

Pros of Buying From a Private Seller

• Lower prices: Private sellers often sell cars at lower prices than dealerships, which mark up prices to help cover marketing, physical space and other business expenses.
• Ability to negotiate: Negotiating the price and terms of the car sale may be easier with an individual.
• Lower-cost loans: If you can get a loan through your bank or credit union, you may avoid some markups from getting a loan through an auto business.

Cons of Buying From a Private Seller

• Potentially more time-consuming: You'll need to pore over vehicle listings and may need to visit several individuals before you find the car right for you.
• Extra diligence required: When buying from a private seller, you take on additional risk to protect yourself against scams because there aren't as many federal and state-level protections.
• More paperwork: The lender may require paperwork from the buyer or seller to complete the lending process.

How To Finance a Private-Seller Car Purchase

You'll likely need a private-party auto loan if you don't have enough cash to buy a car from a private seller.
This is typically a secured loan, using the car you're buying as collateral. Lenders may have limitations on your auto loan. Mileage and age of vehicle limits vary by lender.

In general, lenders won't finance:

• Lemon-law title or salvage title
• Commercial vehicles
• "Grey imports" that are manufactured for non-U.S. nations
• Cars older than the specified limits
• Vehicles with more mileage than the limit

Loan Terms

Your rate will vary based on model year, trim, credit score and loan amount. But lenders may differ in:

• Down payment amount
• Interest rates available
• Loan terms available

At BECU, for example, vehicle loan APR amounts range from:

• New auto (2022 and newer): 6.24% - 18%; estimated monthly payment would be $388.89 per month based on a five-year, $20,000 loan at 6.24% APR.
• Used auto (2009 - 2021) 6.74% - 18%; estimated monthly payment would be $393.57 per month based on a five-year, $20,000 loan at 6.74% APR.

At BECU, loan terms are available for up to 84 months. The lowest auto loan rates advertised are based on a loan term of 60 months or less and a loan-to-value ratio of 90% or less. The vehicle mileage can't exceed 150,000 and the age can't exceed 15 years. LTV is based on Kelley Blue Book wholesale or dealer invoice.

Lender Requirements

Review and compare a few lenders you're considering to learn more about minimum requirements for yourself and the vehicle. You may need to meet requirements for income, employment history and credit score.

You'll likely need to do a bit of extra paperwork to buy a car from a private seller instead of buying from a dealership. For example, depending on the state you're in, a lender might require you to provide documentation from the Department of Licensing and an emissions check certificate. (The state of Washington no longer requires emissions testing). Or the lender may ask to see the car's current registration.

At BECU, for example, requirements include:

• A copy of current, non-expired car registration.
• Borrower- and seller-signed bill of sale for the vehicle.
• Any current lienholder information, including lienholder name, payoff address, phone number, daily per diem and account number.
• If the car is "free and clear" or doesn't have a lien at all, provide a free and clear title.

Using a Personal Loan Instead

Sometimes, you can't get a traditional auto loan for certain cars — such as cars older than 25 years ("classic" cars) or imported cars. So, another option is an unsecured personal loan. A personal loan doesn't use the car or anything else as collateral. As a result, your loan will have a higher interest rate. If your bank or credit union doesn't offer a private-party auto loan, you could apply for a personal loan.

Preparing To Finance a Private Seller Purchase

Determine Your Budget and Credit Status

Check your credit history and score for free to see your eligibility for a private-party loan. Determine how much you can afford to spend on a car, including financing costs.

Research Lenders

Research and compare private seller loans from different lenders, including banks, credit unions and online lenders. Contact the lender by phone to find out what documents you need and ensure you understand their requirements for a private-party loan, including any minimum FICO score.

Research the Process in Your State

Check with your state's vehicle licensing department to determine the process of registering your vehicle, including the bank's lien on your vehicle title. To register your car, the licensing department could require the seller to sign over the title to you, plus a bill of sale documenting the transaction and a copy of your promissory note from the lender.

Get Preapproved or Prequalified for a Private Party Loan

A preapproval or prequalification lets you know how much money you can borrow for how long and at what interest rate. When you get preapproved, a lender makes a credit inquiry. With some financial institutions, this inquiry is a "soft pull" that doesn't affect your credit score. At BECU, preapprovals require a hard pull. Always ask how the preapproval or prequalification process works.

Research and Find the Right Car

Research different models and find the right car for your needs and budget. Check the car's history, including any accidents and previous use. Ask your insurance company to estimate how much insurance will cost if you add the vehicle to your policy.

Review the Seller's Documentation

Buying from a private seller exposes you to scams, whether rolled-back odometers or accidentally buying an unregistered, wrecked or rebuilt car, so this step is crucial when buying from an individual. You must ensure the seller can provide you with the following:

• Title: Ensure the seller has the title and it's free of any liens (other "holds" on the title from financial institutions such as lenders for a debt).
• Registration: Check that the registration of the used car is up to date.
• CARFAX: Either you or the seller should pay for this critical report, which reviews the auto's history on the road and of accidents and maintenance.

Applying for a Private Party Auto Loan

According to U.S. News & World Report, the right time to apply for a private party auto loan is a few weeks before you plan to purchase a vehicle. That way you'll have an appropriate amount of time to review your car loan options, get preapproved for the loan, and stay on track to purchase the vehicle.

1. Gather Your Documents

Documents that may be required include:

• Valid, non-expired, state-issued driver's license.
• Up to two years' proof of income via tax returns.
• Vehicle information, including VIN, make, model, year and mileage.
• A copy of the title, both front and back.

2. Apply for the Loan

Fill out an application with the lender or multiple lenders providing the required documents. This loan application stage requires you to authorize a full credit report inquiry. This inquiry (in contrast to the prequalification) is a "hard pull" and will likely affect your credit score.

Don't be afraid to shop around. If several auto loan credit inquiries occur within 14 and 45 days, they're considered one credit inquiry and only impact your credit as one inquiry.

On the application, you'll provide information about:

• Your identity (Social Security number, birthdate).
• Residence and how long you've lived there.
• Employer's name and contact information and your hire date.
• All income you want to be considered to help you qualify you for the loan.
• Driver's license information.
• References.

3. Wait for Final Approval

At BECU, a loan processor reaches out within 24-48 business hours after receiving your documentation. If your loan is approved, a loan processor schedules your signing appointment.

4. Close on Your Loan

If your loan is approved, you'll receive the loan terms. Review the loan terms and conditions before signing the promissory note. Depending on the financial institution, you may need to attend in person or use DocuSign. Although you may be able to get same-day auto loan approval from some lenders, it may take a few days to receive your funds.

5. Contact the Seller To Finalize the Sale

You'll contact the seller and finalize the sale. In general, this will involve:

• Payment in cash, cashier's check or payment app, or a check directly from the credit union to the seller.
• Vehicle registration.
• Notarized vehicle title application, where you'll add the lender as the lienholder.
• Bill of sale.
• Affidavit of Loss/Release of Interest form completed by the car's seller.

You may have a limited timeframe to complete some paperwork. In Washington, as the buyer, you have just 15 days to visit a vehicle licensing office with the certificate of title, bill of sale and payment for fees and taxes. 

In some states, you pay a sales tax for purchasing a car from an individual when you license or register and title your vehicle. In other situations, you might pay the tax to the lender offering you a private party loan.  

6. Get the Keys to Your New Car

Congratulations, you've just navigated getting an auto loan to buy a car from a private seller.

FAQs about Private Party Auto Loans

What is a Private-Party Auto Loan?

A private party auto loan helps a car buyer purchase a vehicle from an individual versus a dealership. You can often find private-party loans through credit unions.

How Do I Qualify for a Private-Party Auto Loan?

To qualify for a private party auto loan from a credit union, you must be at least 18 and a credit union member. You should be familiar with the requirements for any minimum credit score and income, be able to meet those requirements and provide documentation. Also, be aware of the lender's limitations on vehicles they are willing to finance. Limits might include the number of miles or age of the vehicle.

How Can I Avoid Getting Scammed?

With the vehicle identification number, use CARFAX to review the car's history and use the National Highway Traffic Safety Administration site to ensure it hasn't been recalled. Get the vehicle inspected as well. But remember that you don't benefit from state and federal consumer protections (including the new 2024-enacted CARS rule) regarding dealerships. Don't say yes to a seller pressuring you to send money by wire or pay a deposit before your private party auto loan is approved.

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