With new cars averaging over $47,000 and used cars over $28,000, very few people can just walk into the dealership, write a check and drive away. Most of us will need to save some money first, either for the full purchase price or, if we are financing the vehicle, for a down payment. Here are some steps to consider when saving for your next car.
Key points to remember
- The amount of money you will need to save will depend on whether you are paying cash for the car, making a down payment on a car loan, or leasing the vehicle.
- Making a larger down payment will cost you more upfront but will reduce your monthly costs.
- To stay on track, consider setting up a separate account to save for a car.
Set a savings goal
When saving for a major purchase, it helps to set a concrete goal. If you plan to pay cash for a car, your goal should be the selling price, including taxes and fees. If you are considering financing, you will want to save for a advance payment. The price you pay and how much you need to save up front will depend on a variety of factors, such as whether the car is new or used and whether you plan to buy or lease it.
Buy new or used
If you’re planning on buying a new car, you’ll need to save at least enough money for a down payment. Historically, a 20% down payment has been the norm, but today many dealers and lenders will accept less. Some manufacturers and dealers also offer 0% financing promotions from time to time. The average down payment in 2019 was 11.7% and 10.9% for used vehicles, according to automotive website Edmunds.
Of course, the less money you put aside, the more money you will have to borrow, plus the interest.
The same goes for financing a used car. One difference is that if you’re buying from a private seller, you’ll almost certainly have to pay cash. However, you might also be able to get a Personal loan from a bank or other lender if you are unable to find the total amount on your own.
Purchase vs rental
You can rent a new or used car, although renting is more common with new cars. Lease payments tend to be lower than car loan repayments because you won’t actually own the car, but just pay to use it for a certain period of time.
Leasing also requires a down payment, sometimes called a reduction in capitalized costs, in many cases. It can range from $0 to several thousand dollars. As with financing a car, the less you bet, the higher your monthly payments are likely to be. However, many experts advise against investing more than necessary, in part because you could lose all that money if your rental car is stolen or destroyed in an accident.
Leases often last around three years, at the end of which you can either return the car to the dealer or buy it at an agreed price. If you plan to buy it or lease another car, you will need to save up for the purchase price or another down payment.
If you have an exchange
If you have a car to trade in for your new one, it will reduce the amount of money you need to bring to the table. Typically, you’ll get less for your trade-in at a dealership and more if you sell it yourself. However, selling it yourself also takes more work and more time. To get an idea of the value of your trade-in, consult an online price guide, such as the Kelley Blue Book at KBB.com.
Other costs you might want to save for
When buying a car, especially if you don’t currently have one, you will face additional costs that you may want to budget for. These include:
Registration and state license. If you are buying from a reseller, these may be rolled into the sale price. If you buy from a private individual, you may have to pay for them separately.
Car insurance. Virtually all states require drivers to carry at least some amount of car insurance coverage, and it’s often a good idea to buy more than the minimum if you have other assets to protect against a lawsuit.
Daily operating costs. These will include fuel (petrol or electricitydepending on the vehicle), routine maintenance and periodic inspections if your condition requires them.
In most states, you must have auto insurance to drive on public roads, so plan to purchase a policy before or on the day you buy your car if you don’t already have one. Dealerships will often require proof of insurance before letting you and your car leave the lot.
A few tips for saving
- Start a dedicated car account. To avoid the temptation to spend your auto savings for other purposes, it helps to set up a separate auto savings account. Some good options would be a savings account with your bank or a money market mutual fund. With either, you won’t risk losing any money and you might even earn some interest.
- Make it automatic. Arrange with your bank, mutual fund or employer to regularly withdraw a certain amount from your paycheck and deposit it in your car account. This way you won’t have to think about it or have the chance to spend money on anything else.
- Contribute any available money. If you get a work bonus, government stimulus check, tax refund, or even money for your birthday, add it to your car account.
And finally, when you’ve saved enough money and bought your car, it’s not too early to start saving for the next one.