How can I finance a used car from a private sale?
Considering that 85% of Americans have to commute to work by car, it's not surprising that auto loans are the third-largest source of debt in the country. Unfortunately, buying a car is such a large expense that most Americans can't afford to pay in cash.
Many Americans even look to finance a used car. The good news is that these loans are usually smaller and paid off more quickly than a brand new car loan. The bad news is that Americans who find used car deals from private sellers may encounter some difficulty finding a loan.
To find out how to finance a used car from a private seller, read the information below.
Options to Finance a Used Car
Usually, car buyers will approach banks or credit unions to finance a used car from a private seller. There are generally two types of loans for this -- a personal loan and an auto loan.
What Is a Personal Loan?
One type of personal loan is unsecured, which means there is no collateral required to receive the loan. This makes these loans a risky type of loan for banks and credit unions, as they get nothing in return in the loan defaults.
The other type of personal loan is secured, meaning collateral needs to be put up. Cash or some type of asset with monetary value is acceptable -- for example, another car or a home.
What Is an Auto Loan?
An auto loan is classified as a different type of loan from a personal loan. It is secured, as the car can be repossessed from anyone who defaults on this loan. After all, the bank owns it until the lender pays it off in full.
An auto loan should not be as difficult to qualify for as an unsecured personal loan, and the collateral is the car, but financial institutions often expect a down payment.
Personal Loan vs. Auto Loan
Some people look at the monthly payment amount before they consider the total cost of the loan. Looking at the total cost, most borrowers will find that auto loans are simply cheaper. In fact, personal loans are often twice as expensive as auto loans.
Typically, unsecured personal loans will have lower borrowing amounts and higher interest rates to reduce risk and maximize the reward for the bank. They are not ideal for financing a car.
Secured personal loans, however, require collateral and are easier to qualify for than unsecured personal loans. Although they have lower interest rates and the borrowing limit is higher, they are still more expensive than most auto loans.
Applying for a Loan
It can be easy to apply for a used car loan you are purchasing through a private seller. The credit union needs to ensure that should the borrower default and the used car be repossessed; its value is worth the risk.
At a Chief Financial Credit Union we look at the entire picture for our members and work to help them get the financing they need for the vehicle they want, even if it is purchased through a private seller.
To find out more about this application process, don't hesitate to contact us at Chief Financial Credit Union