How to Finance a Car From a Private Seller

Used cars require close inspection before you pull the trigger.

Used cars require close inspection before you pull the trigger.

When you buy a used car from a dealer, the financing is often completed on site and the process streamlined as much as possible to get you in and out with your new car. When you make a purchase from a private seller, you have to find your own loan and arrange all the specifics in advance so when it's time to close the deal, you have the cash in hand.

Credit Check

Obtain a copy of your credit report and check your scores. Copies of your credit report from all three national bureaus -- Transunion, Experian and Equifax -- are available free once a year by request. Reports can be requested directly from the bureaus or through a variety of online services. Review your reports and eliminate any false negatives. If the scores are lacking, make an effort to repair overdue accounts and improve your credit rating prior to applying for an auto loan. Doing so will ensure that you not only get the loan, but that you get the best rate possible.

Getting the Loan

Visit the bank you normally do business with and request the interest rate for a loan in the price range you plan to spend on the used car. To calculate the estimated amount you need, check the suggested price for the year, make and model car you are shopping and add in any registration, insurance and prep costs that may come into play if you don't want to go out of pocket for those extra expenses. Loan origination fees may also affect the overall cost and must be factored in, as well. Compare your bank's offer with others like credit unions and online lenders and opt for the best deal.

Loan Terms

Lost lenders typically have a minimum amount below which they will not make a private party used car loan. The banks determine that a lesser amount would not deliver enough return to make the risk worthwhile for the bank, so they avoid the deal altogether. Check with your bank to find out if your loan is large enough to be considered. Banks also place limitations on the age of used cars that are eligible for loans and may add in discounts for auto pay or online account management. Loans for private-party auto purchases typically feature shorter maximum payback periods than dealer originated loans -- an average of four years versus six years. The interest rate of a loan for a private-party purchase is likely a bit higher than a loan for a car purchased from a dealer; you may be able to work with a credit union institution that offers competitive rates to its members.

Making the Purchase

Once you have been approved for the loan, obtain proof of preapproval from the lender and bring it with you to shop for a car. When you find the car you want, negotiate the best possible selling price, then return to your lender and request a check in the agreed amount. Your lender will issue you a check which is to be signed over to the seller in exchange for the vehicle and the title, which the seller should then sign over to you.

Registration and Title

The lender files a form with the local Department of Motor Vehicles (DMV) which announces the presence of a lien on your title. At the DMV you have to turn in the title you received from the former owner in exchange for a new registration in your own name. The DMV then sends you a new title with the lien holder (your lender) listed on its face. Once the loan has been paid in full, a clean title devoid of liens is issued and sent to you. You are then considered the sole owner of the vehicle.

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