Things to Know About Car Loans Before Applying

Auto loan

For most people, the purchase of a new car means heading to the bank to apply for a car loan. Auto loans are a great financing option because they allow you to buy a vehicle so you have reliable transportation upfront and are able to pay back the cost of the vehicle over time.

Car loans are different from other types of loans. Auto loan interest rates are affected by your credit score, the term of the loan, and the lender you borrow from. There are a few things to know about car loans before applying for financing so you pick the loan that’s best for you and your situation.

What is an Auto Loan?

An auto loan, car loan, or vehicle loan, is a loan that is designed to fund the purchase of a motor vehicle. As opposed to a mortgage, which uses the purchased property for collateral, or a personal loan, which often requires no collateral, an auto loan is secured against the vehicle you are purchasing.

Like other types of loans, auto loans require an application process during which your credit score and credit history are reviewed. In addition to these pieces of information, a lender considers the value of the vehicle, and whether it is new or used, to decide how much financing to offer you and at what interest rate.

Car loans are offered through dealerships, known as dealership loans or indirect loans, or more traditional financial institutions such as banks, credit unions, and online lenders.

Car Loans and Credit Scores

An important factor that affects the interest rate and approval amount on your auto loan is your credit. Credit scores represent your trustworthiness to lenders in the form of a number, while credit reports show lenders your credit history. This history shows a potential lender your payment history, debt-to-credit ratio, and debt-to-income ratio.

Low credit scores indicate untrustworthiness to lenders, so they are apt to loan less money or loan money at a higher rate to recoup possible losses on a loan. Most financial institutions consider credit scores of 600 or below to be risky, so if your credit score is in this range, consider working to raise your score before applying for a loan.

If you have a credit score of 650 and above, you are likely to find several lenders who are willing to loan you money for a car. The higher your credit score, the more financing a lender will offer. You are also likely to receive a lower annual percentage rate (APR), which means that you pay less over the course of the loan.

Before you apply for an auto loan, check your credit. If you have low credit, try to raise your score before applying for an auto loan or you may get stuck in a high-interest, long-term loan that costs you more money. However, if you have good credit, now may be the time to apply for your auto loan.

60, 72, and 84-Month Loan Terms

When shopping around for an auto loan, consider the length, or term, of the loan. Auto loans are offered for 60, 72, or 84-month terms. Depending on which term you choose, you pay a fixed monthly payment for 60 months, 72 months, or 84 months. Generally, a longer-term loan equals a higher APR.

The loan term matters because although your monthly payments may be smaller with a longer-term, you actually end up paying more over the life of the loan. It is helpful to think of the APR as the total cost of the loan itself. When you apply for a loan, you apply for a loan that covers the cost of the car, but the total loan amount over the life of the loan includes the money that you pay in interest.

When you consider your auto loan options with this in mind, you are able to choose a loan term that cuts down on the total amount you pay for the car. Use an auto loan calculator to work out how much you would pay with a 60-month term versus an 84-month term and decide which number works for you financially.

Dealership Loans vs. Traditional Lenders

When buying a car, consider the differences between dealership loans and traditional lenders.

Dealership Loans

Dealership loans are offered to you at the dealership before you leave the car lot. Although these loans may have you driving away in your new car immediately, they come with hidden fees and higher APRs. If possible, shop around before applying for a loan with a dealership.


Banks are a solid option for auto loans, however many banks have rigid credit requirements for loan approval. Banks often give preferential treatment to existing customers, so a benefit of using a bank for your auto loan is once you are a customer you have access to other financial products in the future.

Credit Unions

Credit unions are a great choice for your auto loan. These institutions offer flexible rates and loan terms for those with good to excellent credit. T&I Credit Union currently offers new car loans up to 60 months at 1.99% APR or used car loans up to 6o months at 2.99% APR for those who qualify.

Online Lenders

Online lenders are rising in popularity and can be a viable option for car financing. There are both safe and predatory online lenders, so do you research if you go with this type of lender. Check out the institution on NMLS Consumer Access before applying with an online company.

car loans

Apply for an Auto Loan Today

When you are ready to move forward with applying for a car loan for your new vehicle, contact T&I Credit Union at (248) 397-9456 to speak to a Loan Officer about our auto loans. Call to discuss our rates and start the application process today.

About Lynn Mayfield

Lynn Mayfield studied business at the University of Kansas and enjoys analyzing new economic trends and how they affect the banking industry’s future. Lynn has worked in loan processing and freelance writing. She enjoys traveling in her free time.

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