Buying a car from a private seller can offer good value for money and allow you access to more vehicle options when you are not restricted to a dealership’s inventory. If you’re considering buying a car from a private seller, you do not necessarily need to pay entirely in cash. A private-party auto loan can help you cover the cost, allowing you to repay the lender over time and make the purchase cost more manageable. Learn more about using an auto loan to buy from a private seller.
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Dealership Inventory Stalled, But Prices Rise
Over the past few years, supply chain problems have left many car dealerships with scant inventory, and the large gap between supply and demand has also pushed prices higher. The average price of a new vehicle was up 6.35% year-over-year between 2020 and 2021. By September 2022, the average cost of used cars had seen a 42.5% increase over the average price in February 2020.
Why Buy Private Instead of From a Dealership?
Buying a car from a private seller means purchasing from an individual rather than a business that buys and sells vehicles for profit. On its surface, buying from a private seller is as simple as making an offer, agreeing on a price, and completing the necessary paperwork. Any person who owns a vehicle can sell it on the private market, and since they don’t have a showroom and other overhead to maintain, the vehicle may be offered at a lower price than you would pay at a dealership.
While these advantages can be significant, it’s also important to note that private sellers generally cannot offer financing, warranties, and other perks typically offered by a dealership. However, private party auto loans can give you a financing option for buying privately. Learn how a private vehicle purchase works, the risks you need to be aware of, and the steps you can take to protect yourself throughout the process.
How Auto Loans Work When Buying From a Private Seller
You cannot use a standard auto loan if you buy from a private seller. Instead, you will need a private party auto loan, which is specifically designed to work with individual sellers instead of a dealership. After you have picked a car to buy, you will apply for the loan with the vehicle’s details and pricing. If approved, the lender would then pay the loan directly to the seller or provide you with a check made out to the seller so you may pay for the car.
Eligibility criteria for private party auto loans vary by lender, but every lender will generally have requirements about:
- Your credit score
- Your income
- Your upfront payment, which acts in the same way as a down payment
- Vehicle value
- Vehicle age and overall condition, including mileage
Private Party Auto Loan vs. Other Loans
Private Party Auto Loan
Standard Auto Loan
Can be used on cars from private seller
Secured or unsecured
Secured; car is collateral
Secured; car is collateral
Unsecured; no collateral
Higher than standard auto loan; lower than personal loan
Lower than personal and private party auto loans
Higher than private party and standard auto loans
Average loan length
Lenders see private-party auto loans as inherently riskier because cars sold by individuals do not have the same warranties or condition guarantees as cars sold by dealerships. For this reason, most private-party auto loans have higher interest rates than standard auto loans.
However, they are not as risky as personal loans because private party auto loans are secured, meaning they use the car as collateral. In contrast, personal loans are unsecured loans. This means that while personal loans could also be used towards buying a car from a private seller, a private party auto loan may offer more favorable terms.
How to Get an Auto Loan to Buy From a Private Seller
Banks, credit unions, and online lenders generally offer private party auto loans. Securing the loan follows this general process:
1. Get a general idea of what kind of car you’d like to buy and how much you intend to borrow.
To apply for a private party auto loan, you need to already have the car selected. To get the best estimates of loan options, your eligibility, and quotes, it is a good idea to shop around to see what kind of car is available in your area that you would be interested in purchasing.
2. Research your lender options and compare quotes.
Once you have an idea of how much you intend to borrow and what car you’d likely purchase, you get loan quotes from lenders. Be sure to get quotes from at least three lenders to get the best range of comparisons. Review the following for each lender:
- Interest rates
- Loan terms
- Lender-specific stipulations, like requirements for minimum loan amounts
- Overall lender reputation
Once you have selected a lender, it is a good idea to get preapproval for the loan so you know how much your budget ought to be.
3. Find your desired car and work with the private seller to get necessary information and documents.
Once you have picked a car you’d like to purchase, work with the seller to finalize the deal and get the necessary paperwork and information so that the loan application will go as smoothly as possible. This includes getting the following from the seller:
- Vehicle make, model, and age
- Vehicle identification number (VIN)
- Copy of the vehicle title
- Copy of the vehicle registration
- Bill of sale with details on the purchase, including sale price
4. Apply for and finalize the loan.
Once you have all the necessary paperwork and information, formally apply for the private party auto loan. Once your application is approved, the lender will go over the details of the loan with you and either set up to transfer the money directly to the seller or provide you with a check made out to the seller. You may then close on the car purchase.
How To Safely Buy a Car from a Private Seller
Whether you are paying for the car with cash, a private party auto loan, personal loan, or a combination of these options, the buying process will generally follow this process:
1. Once you locate a car that you are interested in buying, reach out to the seller to begin conversations.
From questions about the vehicle’s history to price negotiations, many meaningful conversations will occur between you and the vehicle’s seller. When you can, try to conduct conversations via text or email so you have a written record, as this can protect you if there’s a discrepancy down the line. When conversations occur in person or on the phone, take detailed notes and note the date and time.
2. Inspect the car in person.
Inspect the interior and exterior of the vehicle to ensure everything aligns with your expectations. If possible, bring a knowledgeable friend or family member who can give you a second opinion. In addition, to minimize danger, do not go to a seller’s home to look at a car that is for sale. Instead, ask them to bring the vehicle to a public place.
3. Verify the seller’s identity and ownership of the car.
A car’s title is a document that proves legal ownership. When buying a car from a private seller, it’s essential to ensure that they have a valid title, the VIN on the vehicle and the title match, and that the person selling the vehicle is also listed as its current legal owner. Be sure to ask for a photo ID and check that the names on the ID and the title match.
4. Test drive the car.
It’s essential to test drive a vehicle before buying it, but when purchasing from a private seller, this can pose some security risks. Consider taking a photo of the seller’s identification and sending it to a family member or friend before getting in the vehicle with them. Also, be sure to ask for proof of insurance in case you’re in an accident during the test drive.
5. Come to an agreement on sale terms and get any necessary paperwork if you are paying with a loan.
Finalize the purchase price with the seller and other details such as date of ownership transfer and date of sale. A bill of sale should list this information. If you are purchasing the car with a loan, you must also note the car’s details, such as its VIN number, make and model, age, and condition. You will also need copies of the car’s title and registration.
6. Purchase the vehicle.
At this time, you may pay for the car with cash or apply for a private party auto loan or personal loan. After loan approval, your lender will either pay the seller directly or provide you with a check to pay them.
7. Complete the transfer of ownership paperwork.
When you complete the vehicle purchase, ensure that the title transfer and registration paperwork are completed and filed correctly. While the documentation requirements vary depending on your state, you may need the following paperwork:
- Vehicle title, completed by the seller
- Application for Certificate of Title (either with or without registration)
- Notarized bill of sale
- Odometer disclosure statement
- Lien release (if applicable)
You’re responsible for paying the necessary taxes and fees when registering the car. In addition, when applying for your vehicle registration, you must show proof of valid insurance that meets the state’s minimum requirements.
In some cases, it may be advantageous to meet the seller at your local Department of Motor Vehicles (DMV), so you can ensure everything is done correctly and promptly.
Risks of Buying a Used Car from the Owner (and What to Do About Them)
Buying a used car from the owner comes with certain risks. Understanding some common potential drawbacks can help you protect yourself. Here’s a look at some issues you may encounter during your car-buying journey.
The Car Could Have More Issues Than the Owner Disclosed
When you purchase a vehicle from a dealer, it typically goes through a thorough inspection by a professional mechanic. Sometimes, a vehicle’s owner may intentionally hide problems from potential buyers. However, it’s also possible that the seller was unaware of an issue with the car before selling it. Private sellers may not offer this guarantee, and you may not have legal recourse if you purchase a defective vehicle in a private transaction.
What You Can Do
Before buying a used car from a private seller, discover as much about the vehicle as possible. Ask for documentation of the vehicle’s maintenance and an official vehicle history report. Also, check the car carefully and have a vehicle mechanic inspect it before making an offer.
You are Buying the Car As-Is
While a used car purchased from a dealer is typically tested and serviced before the sale, private sellers generally sell the vehicle as-is. This means that you’re responsible for any necessary repairs once you take possession of the car. For example, if you buy the vehicle and the engine, transmission, or other significant part breaks the next day, you’re stuck with the repair cost.
What You Can Do
In addition to having a mechanic check the car’s current condition, do some research to understand common issues that occur with the specific make, model, and year of the vehicle you’re considering buying. Find out how much common repairs cost and factor this potential risk into your offer.
You Do Not Know the Car’s History
Lack of maintenance and past accidents or incidents like fires or floods can significantly impact a vehicle’s performance and lifespan. A car that has yet to be maintained may have bad brakes, worn-out parts, and potentially expensive issues such as problems with the engine or transmission.
What You Can Do
A private seller doesn’t necessarily have to disclose past issues with a vehicle and may not mention potential problems unless you ask, so be sure to inquire about maintenance, collision history, and whether there are any other issues you need to be aware of. You may also ask for the VIN to obtain an accident report.
You Cannot Cancel the Sale and Bring the Car Back
When you buy a car from a private seller, you’re committed to the purchase once you’ve signed the title and handed over the money.
What You Can Do
Before purchasing a car in a private transaction, do your research to ensure it’s truly the right option for you. Test drive the vehicle to ensure it’s the right size for your needs and that you’re comfortable behind the wheel.
The Seller Is Asking for More Than the Car Is Worth
Private sellers may start with an asking price that is higher than what the car is worth. There are several potential reasons for this. They may believe this gives them room for negotiation, they may not know the actual value of the vehicle, or they may just be hoping to sell it to someone who does not know any better. There are no rules regulating a private seller’s asking price, so it’s up to you to protect yourself.
What You Can Do
Research the car’s actual value, then practice your negotiating skills so you can get the car for a fair and reasonable price. If the asking price is significantly higher than the vehicle’s value or the seller is not willing to negotiate, consider walking away from the deal.
You Suspect a Scam
Understanding some common car-selling scams can help you avoid becoming a victim. While many private sellers are honest, fraudsters can use a variety of tactics to take advantage of buyers and dupe them out of money. Watch out for these scenarios:
- Title fraud: When buying a used vehicle from a private seller, ensure it has a clean title and that the seller has the title available immediately. Never pay for a vehicle unless you are sure the seller is prepared to transfer the title over to you immediately.
- Stolen vehicle sale: In some cases, a seller may have altered the title or even cloned a vehicle by transferring the VIN, license plate, and registration stickers from a legal car to a car that has been stolen. To protect yourself, keep a copy of your bill of sale and get a copy of the seller’s driver’s license before paying for the vehicle.
- Money transfer scam: Dishonest vehicle sellers may ask you to pay by wire transfer and give you excuses for why they can’t deliver the vehicle to you until after they’ve received the money. It may be impossible to recover the funds if the seller does not deliver the vehicle. Generally, reputable sellers do not ask you to pay for a vehicle using a wire transfer.
- Curbstoning: Curbstoning refers to an unlicensed dealer who poses as a private seller attempting to sell a vehicle. You may be able to identify a curbstoner by looking up the seller’s name and contact information to see if it’s associated with a long list of vehicles for sale. If you’re concerned a seller is not being completely honest with you, consider walking away and finding a different vehicle.
What This Means For You
Buying a car from a private seller can allow you access to a more extensive inventory of options and better deals. Though you cannot finance the vehicle using a dealership’s plan or a standard auto loan, you can get a private party auto loan to help pay for the purchase. These loans are designed for buying from private sellers, and offer lower interest rates than personal loans. However, there are inherent risks when buying from an individual seller no matter how you pay for the car. Be wary to ensure your new car comes home hassle-free.