The Ultimate Guide to Financing a Car

9 MIN. READ

Experts are optimistic about the car market for the first time since the pandemic. Most dealerships have been lowering the prices of new and used vehicles to compensate for unsold inventory.

However, choosing the right financing option for your new vehicle is more important than ever. While the car financing process might seem daunting in today’s market, preparation and research will help you find a great deal on your next new or used car.

In this guide to financing a car, we provide vital information on financing a car purchase that will help you save money and time before, during, and after the process.

Table of Contents 
 

• Before you finance a car 
• Insurance premium
• Maintenance cost
• Fuel cost
• Features
• New or used?
• Trade-in values

 

• Finances and budget
• Check your credit
• Choose the right lender
• Get pre-approved
• Decide what you need vs. what you want
• During the car financing process
• Shop around to know your expectations
• Put together your documents
• Ask questions
• Don't go over your budget
• After financing a car
• Inspect the vehicle with the dealer
• Get temporary tags, registrations, and insurance
• Understand the maintenance, warranty, and service

Before You Finance a Car

Before proceeding with our guide to financing a car, be sure to do your homework prior to the purchase. Being prepared will help you select the right vehicle for your needs, set realistic financial goals, and avoid making rash or impulsive decisions when dealing with pushy salespersons.

As you begin the auto financing process, the first areas you'll need to research include your finances, budget, credit history, pre-approval, and, of course, what car model and make will best suit your needs.
 

1. Finances and Budget

Organizing your finances and setting a budget are the first steps we recommend taking as part of our guide to financing a car. As you do these calculations, remember that many experts recommend that your transportation expenses, including your car payment, are at most 10% of your income.

First, use your income and recurring monthly expenses to set a budget. It's always a good idea to identify any unnecessary costs you can reduce or omit. Before moving on to the next step of our guide to financing a car, we recommend using these free financial calculators to establish a budget.

Remember to include additional monthly expenses such as insurance premiums, routine maintenance, and fuel costs as part of your budget considerations for buying a car. These considerations can give you a better idea of the kind of vehicle you can afford. For instance, you might find that saving on fuel costs by selecting a make and model with good mileage leaves enough room in your budget for purchasing a slightly newer vehicle.

Insurance Premiums

In 2023, car insurance premiums in the United States averaged $2,118 per year. However, premiums can vary based on a company's policy terms and by state, car type, and driver.

For instance, auto insurance premiums can add up to $3,945 annually for full coverage in Florida. Other factors can cause your premiums to go up, such as adding an inexperienced teen driver to your policy. We recommend shopping around and requesting car insurance quotes before deciding what type of car you'll be financing.

Maintenance Costs

The cost of essential maintenance services varies from car to car, and you'll need to incorporate these added expenses into your budget.

On average, you can expect to spend just under $1,500 on maintenance and repair every year. At the very least, keep up with routine oil changes and tire rotations. Typically, factory-recommended maintenance services are scheduled approximately every 3,000 to 5,000 miles, depending on your driving habits. However, the price of an oil change and recommended maintenance will differ by car type.

Fuel Cost

While gasoline prices have come down recently, filling up your tank can still be an expensive proposition, even more so if your vehicle uses diesel fuel.

Florida gas prices tend to fluctuate due to seasonal maintenance from refineries and increased demand throughout the tourist season. It's a good idea to examine your driving habits and estimate how fuel expenses for the vehicle you purchase will affect your budget.
 

2. Consider Your Credit Score

The next step in our guide to financing a car is to check your credit score. With good credit, you'll qualify for lower interest rates and save money. You will also have a better chance of getting pre-approved for your car loan.

You can request a free annual copy from AnnualCreditReport.com to check your credit report. Review your credit history, and take this opportunity to make improvements or dispute incorrect information on your credit report.

*BONUS: Check out tips on improving your credit score before applying for a car loan.

3. Choose the Right Lender

Not all lenders are created equal, and the cost of financing a new or used car can vary greatly depending on the lender you choose.

Thanks to their not-for-profit model, credit unions can offer more affordable lending products by redistributing their profits. A credit union will also be more likely than a traditional bank to consider a broader range of factors when reviewing your application, which can make it easier to get pre-approved.

4. Get Pre-Approved

With your finances, budget and credit in order, it’s time to move to the next step of our guide to financing a car and get pre-approved. The basic steps in the pre-approval process include submitting an application to a lender, providing your employment and income information, and requesting your desired loan amount and payment terms.

The lender will review your credit history and finances during the application process and make a pre-approved loan offer. Note that each lender you apply with will make a hard credit inquiry, which will appear on your credit report and affect your credit score. However, if you’re shopping around for the best pre-approved offer and making inquiries within the same 14-day window, these actions will only appear once on your credit report.

Also, remember that each lender has a different process, and the time it takes to receive a pre-approved offer can vary from right away to later on the same day to within a few days.

5. Figure Out Your Needs and Wants

With a pre-approved offer, you are ready to start shopping around for your new vehicle. Being pre-approved gives you added leverage to get a better deal and shows you’re a serious buyer. Before you shop for cars, consider what features you need or want and whether you want a new or used car. If your ideal car exceeds your pre-approved loan amount and you already own a vehicle, you can usually get a trade-in deduction to help lower the price of the car or truck you have your eye on.

Features

Today, most cars have standard safety features such as front and rear sensors, a backup camera, blind-spot monitoring, and lane assist. Other features—such as a sunroof, remote engine start, or heated seating—will increase your purchase price.

Consider which features will improve your comfort or make driving more enjoyable, and keep in mind that modern safety features usually represent the best investment since they can potentially save your life.

New or Used?

New and used car prices dropped in 2023, with a 3.5% decrease compared to the peak prices recorded in December 2022. Experts predict that this trend will continue in 2024; we could see a 15% price drop compared to the record-breaking prices of 2022.

If the latest technology is high on your list, you're likely to gravitate to a new car. Most will come with a two or three-year warranty that covers routine maintenance and most repairs. A used vehicle can be a better fit if you’re looking for a lower purchase price, and you can find cars with many modern features by shopping around for models that are only a few years old.

New and used cars have their pros and cons; the best option will ultimately depend on your unique needs and financial situation. However, you should know that price drops tend to be more significant for new vehicles due to the current oversupply.

Trade-In Value

Most consumers trade in an older car for a newer one, but before you tell the dealer you want to trade in, research the value of your vehicle. You can do this online at Kelley Blue Book. When you know your vehicle's value, you can decide whether to sell the car on your own or negotiate a fair trade-in offer with the dealer.

6. Shop for the Best Deal

To conclude our guide to financing a car, we recommend carefully researching the best deal on an auto loan. Compare the rates and terms from banks, credit unions, online lenders, and dealerships to ensure you get an agreement that suits your financial needs and provides ample payment flexibility. In particular, for auto loans, you should:
 

• Compare loan terms such as the interest rate and loan length.
• Consider additional fees such as closing costs or origination fees. These can add up quickly, so you need to be careful and know exactly what you are getting into. Also, be sure to get all this information in writing before you sign any documents.
• Review the loan terms carefully to determine whether the lender will charge late fees or a pre-payment penalty for paying off your loan early.
• Finally, use an auto loan calculator to estimate the interest you will accrue when financing a car and strategically plan your payment arrangement accordingly. Doing so can help minimize total payments and help you get the best deal possible!
• Make sure your lender offers a convenient experience for auto-scheduling your payments or making manual payments online.

During the Car Financing Process

Negotiating is part of the car financing process. You'll ultimately get a better deal if you understand what you can and can’t negotiate.

To negotiate that deal, get pre-approved and do your research before heading to the dealership. While some dealers can be intimidating, getting the best deal can be less challenging if you do these things:

1. Shop Around and Compare Your Options

Don't just stick to one dealer; contact several dealerships and ask for the prices and features of the car you want. You can use this information to get a better price match. Most dealerships will list their inventory and prices online to make this process easier.

2. Put Together Your Documents

Since some dealers may still be experiencing inventory shortages, ensure you're prepared with all the necessary documents in case you need to act quickly. You'll need a driver's license, insurance coverage, a down payment, and pre-approval documentation.

3. Ask Questions

Don't hesitate to ask the dealer for information, such as a breakdown of the sales price and the cost of all add-ons, features, and warranty coverages. If you are trading in a car and have already researched the trade-in value, ask the dealer for their best offer. And ask the dealer about any repairs for a used car or anything unusual you notice during a test drive.

4. Don’t Go Over Budget

Be persistent in getting the vehicle you want. Salespeople can be persuasive, but you should be firm about sticking to your budget. Look for a dealership that is willing to work with you to find a car that fits your budget, and don’t hesitate to walk away if you feel pressured. Remember, this is a business transaction, and your goal is to get the best deal for the vehicle you want within your budget.

After Financing a Car

Now that you've read our guide to financing a car, negotiated the best deal, and successfully financed the right vehicle, there are a few more essential things you'll need to know before driving off the dealer's lot. Before you take your new car home, remember to do a visual inspection and get your registration paperwork and any dealer's warranty and maintenance package information.
 

1. Inspect the vehicle with the dealer: Before driving off the lot, visually inspect and use a checklist to note anything you find. Even if it's a new car, inspect the exterior for any dents or scratches and ensure the interior features and controls are functional.
2. Get temporary tags, registration, and insurance: Ensure your car has temporary tags before driving off the lot. Also, keep a copy of your auto registration paperwork and add insurance to the vehicle. Finally, store your vehicle registration and proof of insurance in the glove box or another compartment for easy access.
3. Understand the maintenance, warranty, and service: Keep up with routine maintenance to keep your car running smoothly. New cars typically have bumper-to-bumper warranty coverage for a specified amount of time. Protect your vehicle investment and consider purchasing additional insurance coverage, such as guaranteed asset protection (GAP) and mechanical breakdown protection.

Finance Your Car With Power Financial Credit Union

You can get the right car at the best price with research and some preparation. And with Power Financial Credit Union, you can save even more thanks to our VIP car buying service and affordable car loan rates. As a member, you can also get discounted rates on auto insurance, mechanical breakdown protection, GAP, and depreciation protection waiver insurance to protect your investment.

Ready to finance your next car? Start on the right foot with Power Financial Credit Union! We understand that every penny counts, so we ensure that all members can access competitive rates and flexible repayment terms, making it easy to take out a loan and make payments over time.

Visit us online or at any of our locations in South Florida and get pre-approved to finance your next car, or learn more about our flexible and competitive auto loan rates. Power Financial Credit Union proudly serves nearly 35,000 members and provides 24/7 access to banking services from anywhere via a mobile device and online banking.