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I recently saw a car that I liked advertised online by a private seller, but I didn't have enough cash on hand to purchase the vehicle. A friend told me that I should consider a private party auto loan. I had never heard of this type of loan, so I decided to find out some more information on it.
What is a private party auto loan? This is a loan where a lender finances the vehicle that you want to purchase from a private seller. This is similar to a conventional auto loan. The vehicle you want must be picked out prior to applying for financing. Once approved, the lender will pay the seller, and you will repay the lender with interest. Lenders typically have specific requirements for the potential borrowers and the vehicles that will be financed.
The General Requirements
Borrowers usually have to meet certain credit and income requirements. They may also have to pay a down payment. The vehicle may have to meet certain age and mileage requirements. A minimum amount that the private seller will accept may also be required. Like conventional auto loans, your interest rate will be determined by a variety of factors such as credit rating, length of the loan, and condition of the vehicle. Longer term loans will typically have lower monthly payments, but you will end up paying more interest over the life of the loan. Some lenders will allow prepayment without penalty.
Many people have had bad experiences buying vehicles from some dealerships and private sellers.
Since the private seller is a stranger and not an established business, it is important to be careful during the process.
Things to Watch out For
- The Seller – It is important to verify the identity of the seller. You need to ask to see a photo identification and make sure the information is current. This may seem rude or uncomfortable, but it protects you from fraud or other problems. If you get a bad feeling about the situation or the seller does not want to cooperate, don't buy the vehicle.
- Vehicle History – It may seem obvious, but verify the vehicle identification number(VIN) on the vehicle matches the registration. Also, verify the vehicle's history with your local motor vehicle department. It is also important to purchase a vehicle history report from companies such as CARFAX. In some cases, the seller may have the report for you. This can tell you if the car has been in an accident, has liens or any other damage. The VIN should also be checked on Safecar. This site will list any outstanding safety recalls for the vehicle. If recalls are due, have them completed before purchasing the vehicle.
- Vehicle Value – This may seem obvious, but make sure you are not paying too much for the vehicle based on its mileage, age, condition, and any upgrades. If the seller has added upgrades such as wheels or a stereo system, make sure they have receipts or documents for the purchase. This will be helpful in negotiating a fair price for the upgrades. Also, the receipts can ensure that the property isn't stolen. The vehicle's value can be found on reputable sites such as Kelly Blue Book or Edmunds.
- Vehicle Condition – It is important to check the vehicle's condition thoroughly. It may be wise to have this done by a mechanic. Look for signs of body repairs or other damage that doesn't match the vehicle report. The odometer should also match the vehicle condition. An important problem to look for is rust, especially in areas with high humidity or snow. Test drive the vehicle in the city and on the highway for a reasonable amount of time. Look for any noises, smoke, vibrations, overheating or any other abnormalities. Make sure all the accessories work such as power windows, seats, radio, and wipers. The safety items such as lights, seat belts, safety warning aids, and airbags should also be functional.
- Liens – Any liens such as fines or loans will have to be settled before you can assume legal ownership of the vehicle. Make every attempt to have the seller settle any liens before you attempt to purchase the vehicle. The private party auto loan lender will probably insist that any liens be settled prior to approving you for a loan.
Personal Loan vs Private Party Auto Loan
Some people who don't have the cash for a private seller vehicle will consider a personal loan. Although this is an option, in most cases private party auto loans will offer clear advantages. The simple fact is that some people don't know that they can get an auto loan to purchase a private vehicle. Below are some factors to consider when comparing the two loan types for purchasing a vehicle.
- Credit Score – No matter the loan, a high credit score will get you the best terms. A personal loan typically requires a higher credit score for approval and a low-interest rate. An auto loan has more relaxed credit requirements because the lender has the vehicle as collateral in case you default on the loan.
- Interest Rate – Private Party auto loans usually have a lower interest rate compared to personal loans because they are secured by a vehicle. Personal loans usually don't have collateral, but in rare cases, they can. The lowest interest rates for personal loans is approximately 5.99%. This is assuming the person has a very good credit rating. Auto loans can be as low as 0-3.99% for individuals with excellent credit. People with average or below credit can pay a much higher interest rate, typically above 10%.
- Additional Fees – Auto loans usually don't have an origination fee, but some could have prepayment penalties. Many personal loans will come with origination and/or prepayment fees. If you shop around and have good credit, these fees could be voided. It is important to compare the annual percentage rate(APR), not just the interest rate with personal and auto loans. APR is a more accurate calculation of the total interest you will pay annually. APR will factor in such things as origination fees.
- Loan Term – Auto loan repayment terms can extend up to 96 months. Most personal loans will not exceed 60 months. it is important to remember that regardless of the loan type, longer periods usually mean you are paying more interest over the life of the loan. Car dealers and many consumers like to focus on the lowest monthly payment when determining if a loan is the best deal for them.
- Collateral – All auto loans use the vehicle as collateral. If you default on the loan, the car will be repossessed by the lender and sold to recoup some of their losses. Some people choose personal loans because they don't require the vehicle as collateral, so the car can't be repossessed if the loan goes into default. Personal loans are not a good idea because of higher interest rates and other disadvantages. If you are taking out a personal loan to avoid a repossession, you probably aren't in the ideal financial situation to afford a loan of any type.
- Ease of Approval – Auto loans and personal loans are offered by a wide variety of financial institutions including banks and credit unions. Both loans are readily available online for comparison shopping and instant approval. Auto loans can be offered at dealerships also.
- Down Payment – Some private party auto loans will demand a down payment, especially if you have a low credit score. A down payment can help lower your interest rate in most cases. Also, the more money you put down, the faster the loan is paid off. There is never a down payment with personal loans.
What are the current interest rates for private party auto loans? These rates can vary greatly depending on the lender and your credit score among other factors. It is best to go online and compare based on your personal information.
Does Chase offer private party auto loans? Chase and most major banks offer these type of loans.