back to articles | February 03, 2023 | Moses Mwangi

Categories: Types of Car Loans

Private Party Auto Loans Vs. Dealership Auto Loans: Which is Best for You

What is the difference between a private-party auto loan and a dealership auto loan? That is the first question anyone who wants to buy a car asks. The two loans may appear similar as they associate with auto loans. However, they are totally different.


In a dealership auto loan, a dealer will act as a middleman between the lending financial institution and you. On the other hand, the private party auto loan requires no intermediary. The best auto loan to finance your car purchase will depend on what the dealership or private party is offering. Below we'll expound more on each auto loan option.

Financing through private-party auto loans

Financing your car through private-party auto loans is best if you wish to buy from a private seller, such as a family member. It will require you to visit a reliable online lender credit union or bank directly to get the loan.

One incredible benefit of the private party auto loan is that you can use it to purchase a used car from anywhere. Unlike a dealership, one shop will not limit your choice. You will become a car buyer if you get loan approval.

In addition, your private auto loan option will differ depending on the type of car you wish to purchase. Some private-party auto loan providers have restrictions on the car's mileage and age. An older car can have a higher interest rate than a new one.

Also, private-party auto loan lenders often cater to customers with higher credit scores. It is because of the risky nature of private sales. However, if you have bad credit, you can still get an auto loan but at a higher interest rate.

Financing through dealership auto loans

Dealership financing is best for you if you seek to purchase a vehicle from a dealer. Car dealers will make the process of financing your chosen vehicles easier. Thus, you can use a dealership to save time you would have otherwise used to search for the best lender. Car dealerships often have a co-existing relationship with credit unions and online lenders. It means that you can finance your car through a specific plan that your dealer has with the lender.

Also, the dealer will take care of all the heavy lifting. When a financial institution approves your auto loan, the dealership's finance department will help you finalize the loan. The process will not be the same for all dealerships. However, you will need to submit proof of assets and income and fill out some forms.

The finance department will also help you to review the loan terms. One significant benefit of dealership loans is that it is easy to qualify for if you have bad credit. However, a higher credit score makes it much easier to qualify for an auto loan and can lead to better interest rate.

The difference between a private-party auto loan and a dealership auto loan

The best vehicle financing can either be from a dealership or a private party. While both can ensure you become a car buyer, the two differ in several aspects. Here are the main differences.

Loan use

A private-party auto loan ensures you can use funds received to purchase a used car in the private market alone. On the other hand, a dealership loan lets you buy a car from a dealer. However, you cannot use a dealership loan to buy a car from a private seller.

Financing processes

The process of financing through a dealership is easier than the private party. For one, getting a private-party auto loan will require you to shop around various financial institutions. Shopping around will help you get an institution and offer that will meet your specific requirements. However, it can be time-consuming and will take a significant amount of effort.

On the other hand, the financing office of a dealership will recommend their preferred lender to you. It means you will not need to spend effort and time shopping around. The department will also help you finalize the loan and fill out the necessary forms. In contrast, a private-party auto loan provider will need you to carry out all the processes required yourself.

Loan rates comparison

A private-party auto loan allows you to compare different loan terms and rates from various lending institutions. It means that you have an opportunity to get the best offer possible from your preferred lender.

That is not the case with a dealership auto loan. A dealership loan will require you to use a dealer's preferred lender. Dealer financing involves an indirect loan. In some cases, it originates from a car dealership to its clients and is then sold to the lending financial institution. The lender will then collect interest and the principle amount from the borrower. On the other hand, a private-party auto loan is a direct loan where a borrower will have direct contact with the lender.

Markups on interest rates

The interest rate on a private part auto loan reflects its true interest. The private auto loan does not include any markup, often present in a dealership loan. You may find that some dealers include a markup to the rate of interest that a lender offers.

It means that the dealer will charge you a higher interest rate than what the financial institution is asking. The dealer will then take the difference as payment for helping with the financing processes.

Ease of car purchase

Dealership auto loans ease the car purchase process as the dealers will arrange financing options for you. On the other hand, if you are considering a private-party auto loan, you will take a significant amount of time. The time-consuming aspect of private-party financing is that you must arrange the car loan yourself.

The dealership loan will save you time and effort, while the private-party auto loan will ensure you can search for the best offer possible. Thus, a private-party auto loan allows you to get a cheaper loan and secure your desired car.

How to select the best option for you

Both the dealership loan and the private party auto loan have their own merits and demerits. They also provide a viable means of purchasing a car. However, the choice of which is best for you will solely depend on your needs.

A private-party auto loan is an excellent option if you wish to buy a vehicle from a private seller. It is also a superb choice if you want to conduct the heavy-lifting processes of loan shopping, loan finalization, and filling out the necessary forms.

On the other hand, if you wish to buy your car from a dealership, the dealership auto loan is ideal for you. It is also suitable if you want to avoid the effort and time-consuming nature of shopping for the best auto loan.

Bottom Line

Both the dealership loan and private party auto loan can help you finance the purchase of a car. The primary question lies in where you wish to buy a car, a private seller, or a dealership. Also, the best way to get the best offer is by shopping for the best repayment terms and interest rates in the market.