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How to Finance a New or Used Car

It’s time for a new car and you’re ready to buy. You’ve found the make and model you want, what’s next? While some people choose to buy a car with cash, 85.5% of new vehicles purchased in the U.S. in the second quarter of 2020 were financed and 36.8% of used cars were financed.1
In this article we’ll discuss car finance options for new and used (pre-owned) vehicles and provide a guide to financing your car, so you can shop with confidence and get the deal that works best for your budget.
Credit Union of Southern California (CU SoCal) is Southern California's fastest growing credit union, offering up to 120% financing for new and used vehicles,2 rates as low as 2.89% APR3, quick pre-approvals, no application or funding fees, a personal auto-buying concierge service, and more!

Call CU SoCal at 866-287-6225 to schedule a no-obligation loan consultation, or apply online today!

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What Is Car Financing?

Auto loans, like other loans such as a mortgage, involve a buyer working with a lender to finance a purchase. Knowing how to finance a vehicle can seem challenging at first, but it’s actually quite a simple process.
As you research car funding options, you’ll want to contact your credit union or bank to get pre-qualified for a car loan, so you know what you can afford.
Be prepared to provide the lender with information on your income and debts. The lender will do a “credit pull” to see your credit score. The term or length of the car loan, the amount of the down payment, and whether the car is new or used will also be considered by the lender as they determine the interest rate and Annual Percentage Rate (APR) to offer you.

What Do You Need to Finance a Car?

  • Proof of identity: Your driver’s license is the best proof.
  • Proof of income: This can be your prior year’s tax return or W-2. If you do not have one of these, the lender will likely ask to see recent pay stubs.
  • Credit and banking history: With your permission, the lender will run a credit check to access information.
  • Proof of residence: A bank statement or a utility bill (water, electric, etc.) in your name with your address.
  • Vehicle information: The car dealer will provide these details on the year, make, model, etc.
  • Current vehicle registration: Required if you’re trading-in your current car.
  • Proof of insurance: Because state laws have insurance requirements you’ll need to show proof of insurance before your loan is approved. If you already own a car, speak to your current insurer about getting a policy for the car you wish to purchase. If you are a new driver, contact one of the many insurance agents in your area to get quotes on a new policy.
  • Method of down payment: Cash, credit card, or check are some of the most popular methods for making the down payment.

Car Financing Guide

Now that you know what documents you need, you can refer to this guide to financing your car to help you understand the steps involved in how to finance a car:

1. Check Your Credit Score

Checking your credit score in advance of shopping for a car and seeking financing will give you an idea of how likely you are to be approved for financing. Many credit card companies provide a free credit report, so be sure to ask yours.
You can also get a free credit report at The credit bureaus Equifax®, Experian™, and TransUnion® are offering free weekly online reports through April 2021.

2. Create a Budget

Creating a budget months before you plan to buy a car makes good financial sense. In addition to saving for a down payment, set aside an amount of money each month as a “trial” car loan payment each month.
For example, if you deposit $300 each month into your savings account, but you find you are short of money at the end of each month, then you’ll need to either make a larger down payment on the car purchase to reduce the payment amount, or find a lower price vehicle that’s better for your budget.
Use this Car Loan Payment Calculator to help you determine how much you can afford.

3. Important Terms:

  • Car Loan: This is the financing a buyer arranges with a lender, such as a credit union, bank or lending entity affiliated with the car dealership.
  • Interest: The interest rate and APR on a car loan are two different things. The interest rate does not include fees charged for the loan. The Annual Percentage Rate (APR) is the total cost the borrower pays on the loan each year, including fees, which are expressed as a percentage. When shopping for a car loan, look for a low APR.
  • Car Loan Term: This is the number of months during which you will have the loan. Most car loans are available in 12 month increments, up to as 84 months (which is seven years).
  • Principal: This is the money that you originally agreed to pay back. Interest is the cost of borrowing the principal. Generally, any payment made on an auto loan will be applied first to any fees that are due (for example, late fees). The remaining money from your payment will be applied to any interest due, including past due interest, if applicable. The rest of your payment will be applied to the principal balance of your loan.
  • Monthly Payment: The amount you’ll pay each month for your auto financing.

4. Loan vs. Lease:

According to The Federal Trade Commission, the monthly payments on a lease usually are lower than monthly finance payments if you bought the same car. You are paying to drive the car, not buy it. That means you’re paying for the car’s expected depreciation during the lease period, plus a rent charge, taxes, and fees.

But at the end of a lease, you must return the car unless the lease agreement lets you buy it. Your unique financial situation and your driving needs can help you determine which car funding option works best for you.

5. Down payment:

This is money you pay up-front to the dealer, which reduces the total amount you will need to finance or pay off with a loan. In short, the larger your down payment, the lower your monthly payments will be.

6. Where should I finance my car?

There are several lending options available, so be sure to research each one to determine which is best for you:

Credit unions: Loan interest rates offered by credit unions are typically lower than rates at traditional banks. Credit unions, offer many car finance options and can provide several important services, including loan pre-qualification, a personal auto-buying concierge, low-cost loan protection add-ons, no application or funding fees, and lending options for buyers with bad credit. To learn about car loans offered by Credit Union of Southern California, click here.

Dealerships: Car manufacturers offer interest rate incentives to car dealers, which helps the dealer compete for your business. To get a good APR for a car loan, be sure to ask the dealer about financing promotions.

Banks: Similar to credit unions, your local bank branch can provide auto loan financing and can provide a pre-qualification. However, if you have bad credit or no credit, it could be more difficult to get approved for a loan, as lending guidelines are often stricter. As not for profit institutions, credit unions often make it easier for consumers to get car loans, and that’s one of the reasons credit unions have a strong reputation among consumers for auto financing.

7. Compare All Options:

Interest rates do change as do special promotions offered by dealerships, credit unions and banks, so be sure to ask questions and explore all of your car finance options before choosing a lender or a loan.

8. Get Pre-Approved:

Your credit union or bank can provide a pre-approval by looking at your income, debt, credit score and other factors we discussed earlier. Knowing your buying power before you start to shop will help you choose a car you can afford.

9. Bring Pre-Approval to Dealer:

With a pre-approval in-hand, car dealers will see you as serious shopper.

10. Set-up Automatic Loan Payments:

Setting up automatic payments from your lending institution will ensure you don’t miss a payment. Missed payments result in high fees and damage to your credit score. CU SoCal can help you set up automatic payments from your checking or savings account.

Why Savvy Consumers Choose CU SoCal

Learning how to finance a car is easy and CU SoCal can help, no matter what your financing needs! We lend on character, not just on credit scores. If you’ve been turned down for an auto loan because of a low credit score, we can help! We listen to your story and look beyond your credit score today to offer the right auto loan that will help you become financially stronger tomorrow.
For over 60 years, the Credit Union of Southern California has been proudly serving Southern California families, and we are the fastest growing credit union in Southern California!
Please give us a call today at 866.287.6225 for an expert, no-obligation consultation, or apply for a CU SoCal auto loan today.

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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