The Basics of Private Party Loans

Happy couple shaking hands with a lender in the office.
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Private party loans can refer to a few different things. The traditional (and most common) type of loan is an auto loan used to purchase a used vehicle. Instead of buying from a dealer, you're buying from a private party, so getting a loan is a little bit different.

The term is also used to refer to loans between individuals. Instead of using a bank or finance company, you agree on loan terms and work together to build your own—without a bank. Some of these loans are a great deal for all involved.

Private Party Auto Loans

In the age of Craigslist and similar sites, finding a used car is easy. But finding funding isn't as simple. If you buy from a dealership, they'll offer (or push) financing, which they've arranged with local or national lenders, and it's hard not to walk out without getting a loan.

When you're dealing with a private seller, lenders are more hesitant. They don't know anything about the vehicle—it's your responsibility to figure out what it's worth. However, banks and credit unions know that there is money to be made in lending money, so they offer private party loans.

Private party auto loans are similar to standard auto loans, but they tend to come with a slightly higher interest rate, and they generally won't last as long (banks are taking more risk with a used vehicle, so they want to limit their risk).

Where to Get a Private Auto Loan

To get a private party auto loan, you'll need to apply. Approval will be based on the same factors that affect every loan: primarily your credit score and your debt-to-income ratio. The lender wants to see that you've got enough income to repay the loan and that you're familiar with borrowing money. If you can't qualify, you can always try using a co-signer.

Numerous banks and credit unions offer these loans. A quick search will show you some of the big banks in the market, but you should also shop smaller institutions. If you aren't having any luck with a big bank, try a local bank or credit union, either of which might be more accommodating.

Other Types of "Private" Loans

Other private-party loans involve agreements between two parties outside normal lending institutions. Sometimes loans between individuals create a win-win situation. They are great for lenders who earn more than they can at the bank. They also work for borrowers who pay less interest than they would at the bank. When borrowers have poor credit, private-party loans may be the only option available, although the lower credit score usually brings a higher rate.

Private lenders are commonly used for house flipping money. Bank loans don't always work well for investment properties, but some individuals (and organizations) specialize in making short-term loans to buy and improve properties.

There are basically two ways to find private party loans: peer-to-peer lending services and people you know. To borrow from strangers, visit a peer-to-peer lending site and apply for a loan. Even if you set up a private party loan with somebody you know, these sites may help with loan documentation and servicing.

Proper Documentation

Documentation is key to any private party loan. Make sure everything is spelled out in writing, and everybody understands and agrees. While it may seem overly formal with someone you know, documentation can prevent headaches and heartbreaks in the future.

To document your private loan, write an agreement or adapt one that's already written. For larger loans, it’s probably best to use a professionally prepared agreement. A lot can go wrong, and good loan agreements anticipate pitfalls. For private party loan documents, search the web, work with a local attorney, or use a peer-to-peer lending service that specializes in these loans. For example, LoanKin sells agreements and even processes payments on mortgages and other loans.

The Bottom Line

Private party loans are a great option for many borrowers. As always, though, be sure you shop around to get the best deal for you. And, if you're taking a loan from someone outside a bank, make sure you document the terms clearly so that you don't run into any problems later.

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  1. Bank of America. "Lock in Your Auto Loan Rate."

  2. "How to Finance a House Flip: 5 Types of 'Fix-and-Flip' Loans."

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