If you’ve made the decision to buy a car, you have many sources at your disposal.
Options for financing a vehicle purchase are numerous and include banks, savings and loans, finance companies, credit unions, online financial institutions, home equity lines of credit, and relatives and friends.
Many car buyers finance their purchases through their car dealer, who has access to loans offered by a number of finance companies, banks, and savings and loans.
Generally, when you buy a car, the salesperson will ask you if you plan to finance your purchase, how much you plan to provide as a down payment, and what type of monthly payment you can afford. Your salesperson will likely involve the sales manager and the finance manager in the negotiations over the car, as the financing package is a part of that negotiations process.
The major benefit of going through the dealer is convenience, as you can buy a car and finance it in one stop. The major disadvantage is that the terms of the loan may not be as favorable as you can get elsewhere.
The brick-and-mortar approach
Borrowing from a brick-and-mortar or online financial institution is another option. Before you fill out a loan application, check and compare rates for loans with varying lengths. Once you find the financial institution with the best terms for the type of loan you want, you can apply for the loan either before or after you've found the car you want to buy.
By applying before you find a car, you can get pre-approved for a loan, leaving you in a strong position when negotiating a price on the car you want to buy at a car dealership. This is one advantage of getting financing in advance, as you won't get the issues of the price of the car and the financing mixed up and can focus on negotiating a good price for the car.
Actually applying for the loan works similarly for both brick-and-mortar and online financial institutions: you fill out an application, either in person (for a local bank) or online (for a local or online financial institution).
The application will ask you a number of questions, including your income, your savings, how much you want to borrow, and what other loans you have, and will also ask you to give permission for the financial institution to check your credit history and credit score. Many financial institutions can get you approval within several hours of filling out the application.
Tap the equity in your home
If you are thinking of tapping your home equity line of credit to pay for a car purchase, check that you have enough funds remaining in your line of credit to cover the purchase. Also, make sure that the interest rate on your home equity loan is competitive with current car loan rates available from financial institutions or your car dealer.
If the rates are similar and you are comfortable borrowing on your home, tapping your home equity line of credit may be economical. Typically, you access money from your home equity line of credit by writing a check for the account provided by the financial institution that granted you the line of credit.
Keeping it in the family
Borrowing from a friend or family is another option. If you are short of money, don't have good credit, and have a good relationship with family members or friends, this may be a workable option. If you can work out such an arrangement with a family member or friend, it is best to keep the repayment on a businesslike basis by crafting an agreement that covers the amount borrowed, the interest rate on the loan, and the repayment provisions.
Dive deeper: How to finance buying a car
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