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The Ultimate Guide to Financing a Car

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8 MIN. READ

If you've been watching the auto market lately, you may have noticed some changes. After a prolonged period of low inventory and high prices, the situation has improved. Dealerships now have more new cars on their lots, and the used car supply has increased, leading to price decreases.

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
    • Finances and budget
      • Insurance premium
      • maintenance cost
      • fuel cost
    • Check your credit
    • Get pre-approved
    • Decide what you need vs. what you want
      • Features
      • New or used?
      • Trade-in values
  • 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


Doing your research and being well-prepared is an integral part of financing a car. Besides saving you time and money, our guide will help you with this. It may also help you 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 and 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 things to do as you determine what car price range is best for you. As you do these calculations, remember that many experts recommend that your car payment and expenses be at most 15% of your take-home 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. If you need assistance creating a budget, check out these free online financial calculators to get you started.

As part of your budget considerations for buying a car, don't forget to include additional monthly expenses such as insurance premiums, routine maintenance and fuel costs.

Insurance premiums

In 2023, car insurance premiums in the United States have averaged $2,118 per year. However, premiums can vary based on a company's policy terms and by state and type of car and driver. For instance, you'll pay higher insurance premiums when adding your teenage son as a driver on your insurance policy, especially if he will be driving a sports car. Therefore, shop around and request 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. 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. Plus, we never know when fuel prices will go up again. Given this uncertainty, 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

Have you reviewed your credit report and know your credit score? With good credit, you'll qualify for lower interest rates and save money. You will also have better chances of getting pre-approved for your car loan.

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

*Bonus: Check out tips on how to improve your credit score before applying for a car loan.

3. Get pre-approved

With your finances, budget and credit in order, it’s time to get pre-approved. The basic steps in the pre-approval process include submitting an application to a lender, providing your employment and income information, your desired loan amount and the payment terms you would like.

During the application process, the lender will review your credit history and finances 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. If you’re shopping around for the best pre-approval offer, however, and make your 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.

4. Decide what you need vs. what you want

With a pre-approved offer, you are ready to negotiate an automobile purchase. Being pre-approved gives you added leverage to get a better deal. 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. Therefore, as you shop, consider what standard features will satisfy you and what additional must-haves you can and will pay for.

New or used?

The good news is that new and used car prices have been coming down in 2022 and 2023. Forbes noted that the average cost of all vehicles at one car wholesaler was down 12.3% in October 2022 from its peak in May. The bad news is that the cost was still up 37% from the cost in November 2019. The advantage to buying a new car, of course, is that it will come with a two or three-year warranty that covers routine maintenance and most repairs. Used cars may have a limited warranty offered by the car dealer or have an extended warranty purchased by the previous owner that can be transferred to you. These are just some of the things you should factor into your new or used buying calculation.

Trade-in values

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 it's best to sell the car on your own or negotiate a fair trade-in offer with the dealer.

4. 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.
  • 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!
During the car financing process

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

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 to know your expectations

Don't just stick to one dealer; visit several dealerships and ask for the prices and features of the car you want. Use this information to obtain a better price match. You can even shop online.

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 very persuasive, so don't let the dealer overwhelm you and push you into a car that exceeds your budget. 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 read our guide to financing a car and negotiated the best deal and successfully financed the right car, 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, don't forget 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: Make sure 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.
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. Power Financial Credit Union proudly serves almost 35,000 members and provides 24/7 access to banking services from anywhere via a mobile device and online banking.