Getting approved for a private party used car loan usually means financing through a direct lender – but if you have bad credit, you may not get approved. Usually, these lenders include banks, credit unions, and online lenders. When you go through a direct lender, you get a direct loan, and you get pre-approved for a set amount. However, going through a traditional auto lender isn’t your only route in getting financing for a used vehicle.
Private Party Auto Loans With Bad Credit
As direct loans are usually reserved for those with good credit scores, and bad credit borrowers usually run into some roadblocks in getting approved by a traditional auto lender. A direct lender may be hesitant to approve the loan, simply because there’s no guarantee on the condition of the used vehicle, and used car valuations can be hard to pinpoint.
This doesn’t mean that it's impossible to get approved by a direct lender, just know that it can be more difficult with bad credit. You should also know that going through a direct lender isn’t the only way to get into an auto loan. If you have a lower credit score, you shouldn’t get discouraged if you get denied by one lender, since there are lots of car loan options for many different credit types.
Borrowers with bad credit frequently want to know if we can help them get a private party car loan. We can't. You need to go to a direct lender to get a private party loan, and they don't typically approve borrowers with poor credit.
Car Loans and Private Party Sellers
Auto Credit Express helps people dealing with unique credit situations find auto financing. Naturally, this leads borrowers to wonder if we can help them get an auto loan to buy a vehicle from a private party. The short answer is no.
Auto Credit Express isn't a lender, so we aren't the ones who provide you with financing. Instead, we match credit-challenged car buyers to dealers in their area that understand and know how to work through many types of difficult credit situations. We work with dealerships all across the country that are signed up with a broad range of lenders that enable them to do so.
Direct Lending vs. Indirect Lending
One big reason why bad credit lenders don't typically provide auto loans for private sales is because they're indirect lenders. On the other hand, the lenders who do offer private party car loans are generally direct lenders.
Direct lenders are those you can directly apply for a loan with, like banks and credit unions. Indirect lenders are those that work through another party to offer financing, like subprime lenders or captive lenders of automakers.
In an ideal world, a borrower could apply for a car loan with their bank or credit union and get pre-approved for a certain amount. They can then search private sales for vehicles in that price range. Unfortunately, direct lenders generally don't lend to borrowers with imperfect credit because they have more strict credit requirements.
At the same time, subprime auto lenders are willing to finance bad credit borrowers as long as they meet their requirements for the loan. However, because they lend indirectly, the only way to get financed through one is to work with a dealership that's signed up with these types of lenders. Because they only work indirectly through dealers, this means loans for private sales aren’t possible.
Other Bad Credit Auto Loan Options
If you’ve already tried applying with direct lenders and were met without an auto loan offer, you still have some options for getting into a car loan. It isn’t a private party loan, though – it's called subprime financing. Subprime simply means bad credit, and these lenders specialize in working with borrowers who have poor credit, no credit, or unique credit situations.
Subprime lenders are third-party lenders that are signed up with a dealership through their special finance department. The finance manager works on the subprime lender’s behalf, and you sit with a dealer to find a vehicle based on how much you qualify for.
Bad credit auto loans are tailored to your personal situation. The amount you qualify for is based on your income, residency, work history, and a few other factors. Subprime lenders have a list of requirements you need to meet, but the good news is that they don’t deny a borrower a loan simply because they have a bad credit score.
Keep in mind that subprime lenders don’t offer private party used car loans because they work through dealerships. However, due to this, you may be able to get into a reliable used vehicle, a certified pre-owned car, or possibly even an inexpensive new vehicle – it all depends on what you qualify for.
Subprime Lenders Need the Help of These Dealerships
Another reason subprime lenders don't provide bad credit private party car loans is that the dealerships they work through act as agents for them. The dealers that do work with bad credit work use lenders to help them in three ways by verifying:
- Borrower Information – The dealership verifies all information on a borrower's application. By making sure income, employment, and residence information, among other things, is correct, the lender has the extra assurance that the borrower qualifies and can afford the loan.
- Car Information – The dealer also ensures the vehicle being financed is what the paperwork says it is, which doesn't happen with a private sale. By verifying the car's equipment, age, mileage, and everything else, the lender feels more secure about providing the loan.
- Title Information – Dealerships verify the vehicle being financed has a clean title, as these lenders won't finance cars with branded titles, which include those that are rebuilt, flood-damaged, or salvaged.
As you can see, the dealer is an important part of the subprime auto loan process. Because these three steps are missing with private party loans, subprime lenders avoid that type of financing.
If you have bad credit, getting a private party car loan may not be possible. Most lenders who offer private party car loans are direct lenders that typically won't finance borrowers with poor credit.
Getting a Private Party Auto Loan
Private party car loans allow car buyers to finance vehicles purchased from an individual instead of a dealership. Private party auto loans are available through many financial institutions, such as banks, credit unions, and other online lenders. You can even get quotes from multiple lenders to shop for the best terms.
Borrowers may apply directly for a car loan with these lenders and, if approved, can deal directly with a private party. You can get a check from the lender to give to the private seller, and they'll sign over the vehicle’s title to you, with the lender as the secured party.
Many car buyers like to go the private sale route in an attempt to find a better deal on a used car. Others avoid private sales because of the extra legwork of setting up meetings and taking care of the paperwork – stuff that's unnecessary when getting a loan through a dealership.
The lenders who finance private party auto loans tend to be direct lenders. As a rule, most direct lenders usually only approve loans to borrowers with good credit, making it hard for car buyers with bad credit to land approval.
Borrowers with poor credit who need an auto loan typically need financing through a subprime lender. These lenders are willing to help bad credit car buyers, but they're normally indirect lenders that you can't approach directly. Instead, they work through licensed car dealerships that help them in two main ways, to verify borrow information and to verify vehicle information.
So it's clear that a licensed car dealer is an important part of the subprime car loan process. It's also easy to see why these lenders wouldn't want to take on any more risk by offering private party loans directly to consumers without a third party (in this case, the dealer) to verify this information.
Subprime lenders won't finance private party auto loans, largely because private sales are missing these two critical elements. The dealers act as a third party to reduce risk, making them an important part of the bad credit auto loan process.
Car buyers with good credit can buy a vehicle from practically any seller they want, but if you have bad credit, getting financed for a private party loan, or any place other than a licensed dealer, can be very difficult.
Private Party Car Loan Questions
Here at Auto Credit Express we frequently are contacted by borrowers with bad credit asking if we are able to arrange a loan so that they can buy a vehicle from a private party. Here's a message we received just last month:
"I would like to know if I can get a loan for a car that is being sold by a private owner, not a dealership. Thank you."
The short answer to this would be "no." But here are the reasons why.
To begin with, Auto Credit Express is not a lender, that's not what we do. The service we offer matches buyers with less than perfect credit to dealers in their area that work with credit-challenged borrowers. These dealers are signed up with subprime lenders. These lenders consider other factors in addition to an applicant's credit score and look for ways to approve them for a car loan.
Secondly, these subprime lenders – the ones that offer car loans to people who have bad credit – typically only work through licensed car dealers.
Here's why:
- Because these loans come with a higher risk of default (because they're offered to buyers with poor credit), subprime lenders typically require the dealer, who acts as their representative, to verify a borrower's income, job, and residence. This is done to make sure the buyer can afford the loan. It also is a way of making sure that the information the borrower entered on the application is correct.
- These subprime lenders also require dealers to verify that the vehicle being financed is what the paperwork says it is. In other words, the dealer must correctly describe the vehicle’s age and mileage, how it's equipped (sunroof, automatic transmission, power windows, etc.), as well as the type of title it has. The last point is especially important because these lenders will not finance any vehicle with a branded title (rebuilt, flood damage, mileage unknown, etc.).
Increasing Your Car Loan Approval Odds
After you receive your pre-approval amount, you can then purchase a car from a dealership, a used vehicle lot, or, sometimes, an individual. If you have your heart set on a private seller’s used car, there are a few things you can do to increase your approval odds.
Before you apply with a direct lender, start saving for a down payment. As a bad credit borrower, nearly every lender you work with is going to require a down payment for you to be considered for an auto loan. The amount depends on the lender and how much you need to finance, but, generally, expect to need at least 10% of a vehicle’s selling price or a minimum of $1,000.
Secondly, you can rate shop – don't feel pressured to take the first deal if it's not good! When you apply for any new credit, a hard inquiry hits your credit reports and it can drop your credit score by a few points temporarily. However, when you apply with a few lenders of the same type within a two-week time frame, it’s called rate shopping, and only one hard inquiry is reflected on your credit score.
Knowing this, take some time to make a list of lenders or financial institutions that may be able to approve you based on their credit score requirements so you don’t waste your time applying to only be rejected. Call various credit unions, banks, and online lenders and ask about their requirements.
Getting approved for used car financing is largely preparing and finding the right lender, preparing your documents, and saving for a down payment to increase your chances of approval.
Your Next Car Loan
With a private party seller, it can be hard to know what you’re buying unless you can retrieve the vehicle’s comprehensive history and pay to get the car inspected by a certified mechanic. This is just one of the reasons why direct lenders can be hesitant to approve someone for a private party auto loan, especially when your credit score is less than perfect. If you don’t want to waste time fruitlessly looking for a dealer or lender that can work with your credit, work with us for free at Auto Credit Express. We take away the hassle of searching everywhere for bad credit lending options, and we match you to a dealership near you with the lending resources you need.
