Things to Know Before Financing a Vehicle

Someone handing over car keys to a couple.

Posted on February 14, 2022 Last Updated: February 14, 2022

For most people, car buying is expensive, one of the largest purchases you’ll make in your lifetime. That is why it’s important to be informed before financing your car. To help you navigate the rough waters of car buying, we’ve put together a list of things to be aware of before you shop for a car and an auto lender.

Direct Financing vs. Dealer Financing

When it comes to auto loans, there are basically two options to secure financing. Dealer financing is one option where your dealer arranges financing between you and a lending partner (typically a bank or credit union). Direct financing involves you working directly with your credit union or bank to obtain a financing (or loan preapproval) prior to going to the dealership.

The Three Key Elements of an Auto Loan

The three main elements of your auto loan are the principal, term, and interest rate. We’ll discuss each of these below:


This is the amount of money you will borrow to purchase the car. The principal is calculated by adding any equity you receive on a trade-in to your down payment and subtracting from the total purchase price. The principal is the amount that is used to determine your monthly payment and the total amount you will pay back over the life of your vehicle loan.


The term is the amount of time it will take to pay off the principal. The longer the term, the lower your monthly payment. A shorter term will require a larger monthly payment, but the loan will be paid off more quickly. Common vehicle loan terms range from 3-5 years, with some loans extending to 7-8 years.

Interest Rate

The interest rate is the cost of borrowing money to finance your car. Lower interest rates not only reduce your monthly payment, but they also reduce the total cost of your vehicle over the life of your loan. Your interest rate will be set by your lender who uses your income and credit history to determine your interest rate.

How Much Should You Spend on a Car?

Unlike a home, a vehicle loses its value over time (depreciation), so it is important to align your car purchase with your income. Experts recommend avoiding overextending yourself financially by following this simple rule of thumb as closely as you can – Put 20% down, finance for a 4-year term (or less) and limit your vehicle expenses to 10% of your gross monthly income. For example, if you make $50,000/year, the combination of your monthly payment, gas and insurance should be no more than $415/month.

How to Apply for a Car Loan

Regardless of whether you choose dealer or direct financing with a banking partner, the application process will be very similar. When applying for a car loan, you’ll need to provide identity documentation (driver’s license/passport), income (pay stubs/bank statements), and a car insurance company that will insure your new vehicle. Once you have all of this information ready, you’re ready to find financing for your car!


KEMBA Offers Auto Loans

Do you live in Central Ohio? KEMBA offers low rates and flexible terms on auto loans for new and used cars with personal 1:1 service to help meet your unique needs. If you compare our auto loan interest rates to other banks and lenders, you’ll find competitive everyday rates and even lower rates for KEMBA Advantage members. If you have questions about getting the process started or getting pre-approved, our dedicated local associates are here to help. Call 614.235.2395 and select Option 4 for more information.


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