What Is Private Auto Financing?

Kenneth W. Michael Wills

Private auto financing refers to an arrangement between two private parties to finance a vehicle. In such cases, one party is looking to purchase a vehicle, but does not have all the required capital to do so. Rather than take a loan from an established financial institution, he or she has the option to turn to a private individual or entity for a loan. Individuals who provide private loans may include investors, someone known personally by the individual seeking capital — like family or friends — or an independent car dealer who provides internal car loans to customers. Consumers seeking private auto financing have several options for finding and securing a private loan.

Man climbing a rope
Man climbing a rope

Most, but not all, individuals seeking private financing options may have credit issues, which complicates their ability to secure financing through conventional sources. Consequently, leveraging private sources of financing through investors, borrowers often incur higher finance rates due to higher risks associated with credit issues. Investors who take on this risk charge these higher rates to spread the risk more evenly through multiple loans. Therefore, if one customer defaults but another pays off the loan as agreed, the higher rates still potentially create a profitable situation for the investor. Customers benefit from being able to secure a loan for needed transportation, where otherwise, he or she may have to forfeit that privilege due to poor credit or lack of credit.

Securing private auto financing through family members, friends or other associates is also another option for some private borrowers. Typically, in such cases the borrower may purchase the vehicle directly from the financier and subsequently make an agreement to pay for the vehicle in installments over an extended period of time. Unlike with investors, in cases such as these, the borrower may save on interest rates or pay no interest at all, depending on the relationship with the financier and the terms established. While many of these loans are often verbally agreed, it is best for both the borrower and lender to put the agreement in writing and secure each other's signature to ensure mutual understanding of the arrangement and for legal protection.

Additionally, the term private auto financing is sometimes utilized to describe a private auto sell where the seller arranges with a financial institution to provide financing of the vehicle he or she is trying to sell. While the term is often applied, such financing is still under a financial institution and does not actually denote private auto financing. Working with an independent car dealer to private finance a vehicle through him or her, however, does. Such arrangements usually require a down payment, followed by monthly installments over an extended period. Interest rates often vary from competitive to excessive, depending on the car dealer’s objective and the borrower’s credit situation.

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