How to Apply for a Car Loan

Applying for an auto loan doesn't have to be complicated -- just be sure to do your homework first.

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Applying for an auto loan doesn’t have to be complicated — just be sure to do your homework first.

It’s 7:15 p.m. and you’re finally on your way home from work. It’s been a long day, but it’s not over yet. You still have to pick up dinner and the dry cleaning before you can catch the bus. It’s going to be 9:00 p.m. before you get home. As you finally find yourself seated under a pile of packages on the bus, you begin to daydream about having a car. No more taking the bus or train. No more riding your bike in bad weather. No more sitting in the back seat of the carpool — you could be the one behind the wheel.

Your neighbor just got a cute new coupe. If only you could too. But how would you pay for a car? By doing what most car buyers do — apply for a car loan. Purchasing a vehicle can be a little overwhelming, especially handling the financing part. But it doesn’t have to be. It is possible to navigate the car buying and financing process smoothly. First, you need to have a good understanding of who the lenders are.

If you have an established relationship with a bank or credit union, that might be a good option to consider. Typically, banks have conservative policies and are geared toward individuals with good credit. It can be harder to get a bank loan, but it could mean a better interest rate. As non-profits, credit unions usually have low operating costs, which can mean better interest rates.

A finance company acts as a retailer selling money. It borrows money at wholesale, marks it up and lends it, and it’s likely to have higher interest rates. Dealerships offer financing, acting as the intermediary between you and the lender. Buyers beware — they make money offering this service through fees and markups.

If you own your own home, you can use it to get money through either a home-equity loan or a home-equity line of credit. Usually these loans have low interest rates and may be tax-deductible. However, should your home’s value drop and you sell, you’re responsible for repaying the home-equity loan, even if you don’t make that money back. With a home-equity line of credit, you’ll likely have prepayment penalties and a lien on your home until it is paid. In a lien, the lien holder (the lender) has first right to that asset until the lien is satisfied.

Now that you know who the lenders are, it’s time to consider your credit.