Cars are expensive but a necessity for so many reasons, and the convenience that comes with owning your own car completely makes it a worthy purchase in the end. Buying a car is a big but wise investment, and saving up for most of the down payment would reduce the stress of getting a loan to cover everything.
The idea of saving towards most or even all the down payment is to lessen the amount of money you’ll borrow and the interests that would have piled up from all the monthly car payments, preventing you from putting money into other projects or covering monthly expenses.
In the case of getting a car loan, there’s no room for defaulting on a car payment, as this could make you fall behind on your auto loan, resulting in repossession. It could also hurt your credit rating, making it harder to take out loans in the future.
Also, deciding whether to get a new or used car is the main factor as new cars are more expensive and often come with higher insurance premiums but offer warranties and lower interest rates. On the other hand, a used car offers lower monthly payments, insurance premiums, and registration costs. If this isn’t your first car and you only need an upgrade due to a fault, it would make more sense to trade-in the other one than to get a brand-new car outright.
Either way, buying a car can be expensive and you’ll need to save up. So if you’re looking to learn how to save money for a car, you’ve come to the right place. Let’s dive in so you can start saving and get on the road!
How to Save Money for a Car: 5 Top Tips
Creating a savings plan will go a long way in helping you save money for a car and still cover other expenses like student loans, gym membership, and other things included in your budget. Sometimes, however, this involves getting a side job for extra cash to complement your monthly income. So here are some tips to help you save money for your new car.
Determine how much you plan on spending on your new car and then prepare a budget for that goal. Calculate monthly expenses, including money saved as emergency funds, subtract this from your income, and this will let you know how much you can afford to save up for the car.
2. Open an Auto Savings Account
Call your account manager and ask for an auto savings account to be opened for you and for automatic transfers of a certain amount to be activated from your salary account.
This will help you worry less about removing the car savings each month as it will automatically be deducted for you. Start saving a little at a time but make it regular. Before you know it, you have racked up a healthy amount to cover the down payment.
3. Cut Expenses
After an overview of your monthly expenses, look for ways to cut down on your spending habits. For example, shaving a few items which are more ‘wants’ than ‘need’ off when you visit the grocery shop will leave you with some extra money that could go into the car savings.
4. Trade-In or Sell your Old Car
Doing this will have a substantial impact on the cost of your new car. Selling your old vehicle might bring in more money but could take longer and cost you more effort. So, the more prudent option would be to get the trade-in value of your current car.
5. Get a Side Job
Asides from your full-time job, a side job would go a long way in covering additional expenses like paying off student loans or car-related expenses.
Calculating the Car Payment Cost
Calculating the car payment involves down payments, monthly payments (if you decide on financing), and associated costs like registration. It is a general rule to put down 10% of the sale price for a new car and 20% for a used one.
Factor in tags and title fees. Then use an online auto loan calculator to estimate your monthly payments. Remember, these can vary based on sales tax, interest rates, and the trade-in value of your old car. Loans can be secured from car dealerships, a bank, credit unions, or other lending companies.
Credit unions and smaller lending companies could be especially helpful to finance an older used car, as larger banks usually do not finance cars older than 10 years.
Saving Money for a Car with a Savings Account
Between cutting back on expenses and hustling for extra cash, it would make more sense to store that money somewhere, preferably out of reach.
Opening a savings account could be the needed solution. After figuring out what you can comfortably afford for a car payment, open a car savings account and automate a certain amount to go into the account till you raise enough money.
Setting up automatic transfers will ensure that your savings are regular and continuous in order to get the most out of your savings plan. The car savings account can help you keep track of exactly how much money you have for a down payment before going to the car dealership to check out cars in your estimated price range. While saving also factors in recurring costs like insurance, gas, and maintenance, a car is a depreciating asset and requires care.
Banks and credit unions (a cooperative financial institution set up and managed by its members) offer savings account, and the money is insured by the Federal Deposit Insurance Corporation (FDIC) to a certain limit. However, a service fee may be charged if more than the permitted number of monthly transactions occurs.
Savings Account Options
When choosing to open a savings account, you can take note of the following options:
1. High-Yield Savings account
Consider opening a high-yield savings account because it also earns a higher interest rate than a standard savings account in addition to FDIC protection. However, it requires a larger initial deposit, and access to the account is limited. Research best high-yield savings account rates to ensure that you’re maximizing your savings.
2. Certificates of Deposits (CDs)
CDs are available through most banks and credit unions, and they offer higher interest rates which are FDIC insured. Following a simple rule to keep the money for a specific amount of time, ensure all interests accumulated can be accessed.
Popular CD maturity periods are six months, one year, and five years after which all earned interest will be added.
When to Take a Car Loan
If you plan on getting a car loan, knowing your credit score and leveraging competing loan offers at car dealerships can help you get the best possible deal. If you have a shaky credit score, try not to let your excitement at getting a loan show, so dealers don’t capitalize on this and endeavor to ask if lower rates are available.
Getting pre-approved for a loan from your bank or a credit union could help in case you decide to buy from a private seller whose offer is really good. In addition, the pre-approval will act as a valuable bargaining chip with dealers. Avoid an impulse purchase at the dealership and only go with the right estimates.
Keep your loan term in mind to keep saving up to pay it all off. Common loan terms are 36 months or 72 months, although a loan term could exceed 72 months. The longer the loan term, the more you will pay in total interest for the car. At the beginning of the loan, your loan agreement will specify your monthly payment and how many payments you must make to fully repay the loan.
Making a Down Payment on a Car
A down payment is the amount of cash you put towards the purchase price of the vehicle. The higher your available cash, the better offers you can get on a car purchase. A down payment leads to lower monthly payments and less interest paid over the duration of the loan.
Reducing the interest expense and your monthly payment will allow you to keep more of your monthly income for other expenses. More money is always appreciated in case of emergency situations. You might also qualify for special programs where dealers offer special financing options for those who make larger down payments.
Offering a down payment can significantly improve your chances of getting auto loans, even with a lower credit score. A down payment could also mean not taking coverage insurance if you don’t want to. Sometimes, it is possible to cover major repairs or a replacement on your own without insurance, so you don’t have any need to rack up insurance costs.
In rare cases where you get a 0% interest rate auto loan, it would make more sense to put down zero amount on your car payment and instead put your money in a savings account that earns interest allowing you to come out ahead in a few months.
Making down payments can also give you great equity, which is the difference between how much you owe on your loan and how much your car is actually worth. How this happens is that having negative equity (also known as being “upside-down” on your loan) is when the loan amount is more than the actual value of your car, and a down payment helps keep your equity positive, thereby avoiding this.
Cutting down on spending habits could result in more money to put towards further savings or other expenses. If you saved up enough money, you could even afford to buy the car outright and pay cash or with lower monthly payments.
Once the current car loan is paid off, it would be a wise decision to start putting away monthly payments towards your next car purchase if you desire an upgrade.
Not many people walk into a car dealership and plan on writing a check or paying cash. Salespeople capitalize on this to focus the negotiations on how much you can afford to pay monthly for the car, which tends to favor the company more than the buyer.
Conclusion: Saving Money for a Car
Choosing the right vehicle is a big factor that most people forget to consider. There’s no need to go for a luxurious vehicle knowing fully well that it is above your pay grade. Therefore, it is best to do thorough research and be very sure about the particular car you need and can afford before heading to a dealership.
Another factor to thoroughly consider is the hidden long-term maintenance and car insurance costs that come with a vehicle, whether on new cars or used cars.
Keep in mind that car insurance premiums typically increase with the value of a vehicle, so buying a more expensive vehicle will increase your annual insurance costs, which could amount to hundreds if not thousands of dollars.