back to articles | February 03, 2023 | Moses Mwangi

Categories:   Types of Car Loans   

How to Get the Best Rate with Private Party Auto Loans

If you want to purchase a car, you must first be well prepared to finance the process. Private party auto loans help you achieve this dream where a lender lends you money to purchase a car from an individual owner but not a dealer.


If you want to purchase a car, you must first be well prepared to finance the process. Private party auto loans help you achieve this dream where a lender lends you money to purchase a car from an individual owner but not a dealer. In most cases, the interest rates of this kind of loan are high. Also, terms and conditions to be followed when getting a private auto loan vary across financing entities. Therefore, you need to understand the entire borrowing process involved in getting a private party auto loan. Understanding the various financing options, terms, and conditions could help you avoid high-interest rates, thus saving you a lot of money.

Where to get private party auto loans

In most cases, big financial institutions offer private-party auto loans. These institutions include online lenders, community banks, and credit unions. However, certain criteria are followed before a private party auto loan is given out, and mostly the lenders require you to purchase a car that is at most ten years, and that has not hit one hundred thousand miles. Some lenders also have a minimum loan limit, so you have to search for another lender if the car loan you need is beyond what they can offer.

Advantages of private party auto loan

Compared to personal loans and loans from an auto dealership, private party auto loan enables you to get a car even if you have a poor credit score. Typically, it is hard to acquire a loan with a bad credit score. However, private auto lenders do not concentrate on your credit score when offering a car loan. Furthermore, other lenders require you to place a down payment, but it is easy to get a private lender who is willing to omit this part. Finally, a private auto loan does not take you through a complicated approval process, thus saving you a lot of time.

How to evade high rates for private party auto loan

1. Maintain a clean credit score

As mentioned earlier, private lenders most times tend to sign loans for you, even with a bad credit score. However, in such a situation, the private lender may choose to compensate for this by scaling up the loan's interest rates. Giving an auto loan to an individual with a bad credit score puts the lender in a risky situation of losing the money as they cannot entirely trust you to pay them back. In order to prevent the private lender from imposing high-interest rates beyond the normal rates, you should maintain a clean credit score which will lower the interest charged on your private party auto loan.

2. Borrow what you can afford

Your principal private party auto loan greatly affects the interest you will pay to the lender. This is because the more money you borrow translates to a higher risk to the lender. For example, if you borrow a loan of $20,000 and spread out the repayment period over five years, you will end up paying $2,645.48 as interest. If you increase the principal amount by $30,000, the interest rate rises to $3, 968.22.

It is, therefore, advisable to create a budget before borrowing an auto loan from a private party. This ensures that you only borrow the amount you can pay back without any difficulties. A budget also ensures that you are able to calculate the amount you will be required to pay monthly by the lender. Only borrow what you require in order to avoid defaulting.

3. Review the loan term

When a private party auto loan is spread out through a longer repayment period, it means that you will be forced to pay higher interest rates. This is because a longer term means that the monthly or annual repayments are subdivided into small amounts. Therefore, it is advisable that you take a loan with a shorter term to avoid the high-interest rates associated with longer terms. This strategy can end up saving you a few dollars.

4. Consider car age and mileage

Many private party lenders will not finance loans for cars used for a period above 10 years. Also, many lenders only finance vehicles with mileage of 100,000 and below. This is because such vehicles are considered unreliable, and their failure tends to increase with time. Older cars also come with higher mileage; thus, the lender has to consider the appraised value if they have to repossess the car at any particular point and ensure that they will not lose value for their money.

The interest rates on private party auto loans for older cars are comparatively high compared to that of new cars. This poses a potential risk when borrowing a loan from a private party, considering that most of them treat the car as collateral. To avoid paying high interest rates for an old car, you should apply for a loan on a new car or a less used car in order to save yourself the agony of paying back huge amounts of money for a car that might end up not helping you.

5. Shop around for different lenders

Whenever you are looking for an auto loan from private party lenders, ensure that you search for several prospective lenders and compare their terms and conditions on loans, interest rates, monthly deductions, and the amount they charge in penalties. This is the only way to ensure you do not settle for an expensive lender. Shopping around also gives you a chance to source information about documentation required by each private party lender. It enables you to settle for the lender with a straightforward documentation process. This way, you are left with a clear idea of the money you will spend throughout the process.

6. Maximize your savings

Before considering taking a private party auto loan, ensure that you build on your savings. The more savings you have, the lesser the loan amount you are likely to apply. It is, therefore, a good strategy to first save for the car you intend on buying and only take a loan when the amount you have saved is larger or closer to the amount you are borrowing. This will save you from paying large amounts of interest rates.

7. Automate your monthly payments

Autopay discount authorizes the deduction of a loan from a bank account of your choice automatically on a monthly basis. This strategy reduces the auto loan interest rate to about 0.50%. This gives you the best rates when taking an auto loan from a private lender. Also, the strategy ensures that you do not default on your monthly repayments, thus creating mutual trust between you and the lender.

Bottom line

A private party auto loan is a great option when purchasing a car. It comes with fairer terms compared to other lending options. However, it is essential for you to do a thorough survey and research before settling down on the best lender. Considering that most private party auto loans take place outside financial institutions such as banks and credit unions, it is only right for you to ensure that all documents are in check to avoid getting into trouble later.