Buying a used car from a private seller can be a great way to get the car you want for an affordable price. To finance a car from a private seller, you’ll need a private-party auto loan. This type of loan allows you to borrow money in order to buy a car from an individual rather than a dealership.

There are a lot of advantages to

buying a car through a private seller

—especially when it comes to cost. Individuals usually charge less than a dealership and may be more willing to negotiate price. But if you don’t have the cash to pay for the car in full, then it’s time to talk to your bank or credit union about securing a private-party car loan.

Do you need to finance a used car from a private seller but aren’t sure where to start? Here with everything you need to know about private-party auto loans is

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What is a private-party auto loan?

Since private sellers don’t offer financing, you’ll need to go through a bank, credit union, or online lender if you want to borrow money to buy a used car from an individual rather than a dealership. With a private-party auto loan, the lender pays the seller, and you are responsible for repaying the amount you borrowed plus interest over the term of your loan.

How does a private-party car loan work?

A private-party car loan functions similarly to a traditional

car loan

, and uses an annual percentage rate, interest rate, and the length of the loan to determine what your monthly payment will be. A private-party car loan is a secured loan, which means that, just like in a traditional car loan, the lender can repossess your car if you stop paying.

Once you establish how much you’re borrowing and sign your loan agreement, your lender may give you a check made out to the seller or they may deposit the funds directly into your bank account.

Some lenders will even help facilitate the transaction between buyer and seller by handling things like getting a payoff quote from the seller’s lender if the seller has an ongoing loan or establishing ownership transfer with the DMV.

MORE:

How to find out if a used car has a lien

How to get a private-party auto loan

If you want to finance a car from a private seller, the first thing you’ll need to do is check with your bank, credit union, or preferred lender if they offer private-party auto loans. Not all lenders offer this type of loan, so you may need to shop around before you find what you’re looking for. Here are a few lending institutions that offer private-party auto loans:

Bank of America

PNC Bank

First Credit Union

Logix

LightStream Lending

Make sure you know what vehicle you plan to buy before you apply for a private-party auto loan. Your lender will ask for some documents and information about the vehicle, such as its registration and title, its VIN (vehicle identification number), and a bill of sale that includes the purchase agreement. If the seller has an ongoing loan, then you will also need a payoff quote from their lender.

Additionally, your lender will also ask you to provide some personal information like your Social Security number, your address, employment status, and your income.

What factors will affect the costs of a private-party auto loan?

The costs for financing a car from a private seller are determined in the same way as when you finance a car from a dealership. The two main factors that affect the monthly payment on your private-party auto loan are:

Credit score. In general, if you have a credit score above 660, you should qualify for a lower interest rate. You can still get a private-party auto loan with a lower credit score, but your monthly payments will be higher.

Loan term. Most lenders offer private-party auto loan terms between 12 and 84 months. Keep in mind that a longer loan term means you’ll pay more in interest over the life of the loan, but your monthly payments will be lower.

Your lender may also factor the age of the car you’re buying and its mileage into your interest rate.

To save money on a private-party auto loan, compare loan offers from multiple lenders, and look for the lowest interest rate and

APR

(annual percentage rate)

Key Takeaway Compare loan offers to save money on your private-party auto loan.

MORE: What is a good credit score for a car loan?

Private-party car loans vs. personal loans

One alternative to a private-party car loan is a personal loan. Because personal loans are unsecured, the lender can’t repossess your car if you default on your payments. This means that personal loans are a high risk to the lender, and usually have significantly higher interest rates.

If you’re looking to finance a car from a private seller, a private-party auto loan is almost always going to be the best—and cheapest—option. However, it can be difficult to secure a private-party auto loan for a vehicle that is very old, has high mileage, or has a salvage title. In these cases, taking out a personal loan may be your only option.

Should I get a private-party auto loan?

If you can get a good deal on a used car through a dealership, a traditional auto loan will usually have a lower interest rate and lower APR than a private-party auto loan. However, taking out a private-party auto loan is still your best option if:

The car you want is cheaper to buy from an individual than from a dealership

You can’t find a car in your price range at a dealership

The car you want is only available through a private seller

A personal loan will always be more expensive than a traditional auto loan or a private-party auto loan. Only consider a personal loan if you have no other option.

Key Takeaway Private-party auto loans are a great way to finance a car from a private seller. Personal loans are expensive and should only be considered as a last resort.

MORE:

Should you get a 72-month car loan?

How to save money on your car loan

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