What’s the Best Way To Finance a Car When Buying From a Private Seller? You can often get a good deal on a used car when you buy from a private seller. You can save hundreds of dollars compared to buying from a dealer.
But chances are, you’re still going to shell out a lot of money. Dealers can finance your purchase. It’s unlikely that you’ll get financing from a private seller.
You could just save up money until you have enough cash to pay for the car you want. But, if you’re like a lot of car shoppers, you need a car now. What can you do?
You have a few options:
- Traditional bank loan.
- Credit union loan.
- Peer-to-peer loan.
Which is right for you? It depends.
- Your credit score.
- Penalties for late or missed payments.
- Interest rate %.
- How long until it’s paid off.
- Penalties for early payoff.
Here’s a summary of each kind of loan with the benefits and drawbacks of each.
Financing a Used Car With a Traditional Bank Loan
Banks are the established leaders in lending. Many big banks have a good reputation and a huge cash flow.
But banks rate used car loans as a higher risk. You’ll pay a higher interest rate.
And they consider private sales an even higher risk.
- They don’t offer consumer protections.
- They may not have paid off a loan on the car.
- Resale value is hard to predict.
- Repo rates are higher.
The interest rate’s higher, but a bank loan might still be worth it...
... Because you can negotiate a lower price with a private seller than you’d get from a dealer.
In other words, the dealer has to make a profit. They bought the car at a wholesale rate. They then mark it up to a retail price and sell it to you.
A private party can sell at lower then retail. They’d still get a better price than they would from a dealer.
Financing a Used Car With a Credit Union Loan
A credit union offers the same financial services as a bank. The difference is, they are not-for-profit institutions. That means they don’t have to boost their bottom line as banks do.
They also pay lower taxes than banks, and they pass on the savings to their members.
That means you’ll most likely get a lower interest rate from a credit union. You’ll also find that the approval process is much easier and friendlier than with a bank.
They are forgiving if your credit report has a few blemishes. If your credit score is good, but not excellent, it might be the best way to finance a used car.
The hitch is, you have to be a member.
Every credit union has membership requirements. They serve workers in a particular industry, people who work for a particular company, or who live in a certain geographical region.
For example, you can only join a teachers’ credit union if you have worked in education.
But not to worry, there are credit unions for almost anybody. Chances are, there’s a credit union for people who live or work where you do.
If all else fails, South Division Credit Union is open to people who live or work in the United States and their family and friends.
The money for peer-to-peer loans comes from private investors. They get a higher return on their accounts than they would from a high-yield savings account or a certificate of deposit (CD).
The investors put money into a lending account. When you apply for a loan, account holders will see your loan request with a risk score. They decide whether or not to fund your loan.
It can be good for you if you have a hard time getting a loan from a bank or credit union, and you’re willing to pay a higher interest rate. Although you’re a higher risk, investors may be willing to take on your loan for the higher return.
Peer-To-Peer Loans Are Unsecured
With an unsecured loan, you don’t put up your car for collateral. So if you get behind on payments, your car doesn’t get repossessed.
Late and missed payments do get reported. Even though there’s no repo, it affects your credit score.
How To Get a Peer-To-Peer Loan
Lending Club is the giant of the peer-to-peer loan industry. If your credit score is 600 or higher and you have a low debt to income ratio (DTI) you can get approved for a car loan.
Peerform. If you have excellent credit, you can get a low APR. The maximum amount you can borrow is $25,000.
Upstart considers your job and education history as well as your credit score. If you’ve just started adulting and haven’t established a credit history, Upstart might be the best place to get a car loan.
Prosper. While Upstart caters to borrowers with limited credit history, Prosper is best if you have established credit.
Payoff. If you have fair credit, but not great, you may qualify for a car loan from Payoff. Loans aren’t available in all states.
Prequalifying For a Used Car Loan
You may have heard that when you apply for a car loan, it leads to a drop in your credit score. It’s because when you formally apply for a loan, the lender does a hard credit inquiry.
A hard inquiry can cause a drop in your credit score of 5 points or more. If you’re approved for the loan, your score comes back up after you’ve made a few payments.
Pre-qualification lets you see what interest rate you’ll pay.
It doesn’t guarantee that you’ll be approved for the loan.
Tips for Getting Used Car Financing
Know Your Credit Score
The Fair Isaac Corporation created the credit score that most lenders use to approve or deny a loan. It’s now known as the FICO score.
The scores range from 300 to 850. Lenders consider a score of 650 and higher as good credit. If you have a score below 620, you’ll have a hard time finding a loan with a decent interest rate.
3 major credit reporting companies track your FICO score.
You’re entitled to get a free credit report from all 3 companies once every 12 months. All you have to do is go to annualcreditreport.com to request it.
You will get a separate score from each company.
What about the free credit reporting from CreditKarma?
They offer you a free credit score based on two of the 3 reporting companies, Equifax and TransUnion. You can check your score as often as you want and you pay nothing.
They’ll even send you updates if your score changes.
You may have heard the saying, “There ain’t no free lunch.” Since CreditKarma is a for-profit company, what do they get in exchange for free credit reporting?
CreditKarma gives you the score in exchange for learning about your spending habits so they can charge companies to serve you targeted advertisements.
In other words, after looking at your score on CreditKarma, info about your spending habits gets sold to advertising agents. They then match you up with ads for products or services that you are likely to buy - or at least more likely than the average person.
Then you start seeing those ads while you’re web surfing or scrolling on Facebook.
You’ll get an accurate score. CreditKarma wants you to visit their site often, so it’s in their interest to give you accurate info.
How To Increase Your FICO Score To Get a Used Car Loan
A good credit score is the key to getting a low interest rate on a used car loan. But what can you do if it’s not so good?
It takes a little time to see a difference, but a few small steps can boost your score.
Pay your bills on time. Lenders see past behavior as an indicator of future actions. Establish a track record of paying on time. Set up automatic payments for everything you can.
Keep your credit card balances low. Credit rating companies use the credit utilization ratio when they determine your score. It’s the total of all your credit card balances at a given time divided by your total credit limit.
Let’s say your credit limit is $10,000. If you have a credit card balance of $1,500, your credit utilization ratio is 15%.
A ratio below 30% (average of 12 credit card statement balances) will help you get a healthy credit score.
Don’t close credit cards you’re not using (unless there’s an annual fee). Remember, it’s your average card balance divided by your total credit limit. If you close accounts, it might increase your credit utilization ratio.
Don’t apply for new credit too often. This includes loans, mortgages, and credit cards. Each application opens a hard credit inquiry. Too many hard credit checks can lower your score, and it stays on your report for 2 years.
Dispute wrong credit info. Sometimes credit events show up on your FICO score that aren’t yours. It might belong to someone with the same name or who previously lived at your address. Visit the reporting company’s dispute center and open up a dispute case.
When you need to finance a used car from a private seller, you might find a good interest rate from your local bank. If not, you might find a better deal by joining a credit union.
You can borrow money from a private investor by applying for a peer-to-peer loan. Since it’s an unsecured loan, you won’t get repo’d if you fall behind on payments.
But it will ruin your credit rating.
Whether you’re selling or buying, no one makes private car trading easier than PrivateAuto.
- Dealer-quality services in the palm of your hand.
- Integrated banking service lets you safely transfer funds.
- State-specific documents you can complete and sign directly from the app.
Buy or sell a used car with PrivateAuto today