Buying a car is one of the most important transactions most consumers make in their lifetime. You can buy a car with cash, or you can decide to finance it. But in either case, saving up in advance is essential. Even if you plan to get an auto loan, saving for a down payment will help you keep debt to a minimum. This guide offers simple strategies for generating savings to purchase a vehicle outright or generate a substantial down payment before you start shopping.
Table of Contents
Step 1: Decide what kind of car you want
Before you start saving, it’s a smart idea to set a target for how much you need to save. I know from experience that I achieve what I set out to do when I have an exact written plan, including start and end dates. You are 42% more likely to achieve your goals by writing them down.
First, ask yourself whether you want a pre-owned car or a new one. To find prices for a new car, you can go to the manufacturer’s website or a local dealer to see their specials. Be aware that the prices in those advertisements are typically for one car only, and yours will probably be a different model with different equipment, and thus another (likely higher) price.
For used cars, look at sites such as Kelly Blue Book or Edmunds. They list cars going back to the early 90s. If you want to get a classic or antique vehicle built before 1990, you can visit Hagerty. When you are on those sites, be sure to have the exact make, model, and options to get the most accurate price.
Once you have the purchase price of the vehicle you want, you can move on to Step 2 to determine how much you need to save and when.
Step 2: Evaluate how much you need to save for a car
Based upon the price of the vehicle you plan to purchase and your budget, you need to decide whether you will want to put money down and finance the balance or pay for the car in full.
Whichever way you choose, you’ll need to plan out how much money you need to save up to accomplish your goal. Let’s look at both possibilities so we can see the advantages and disadvantages of both ways.
Paying in full
Paying in full is great because you won’t have any additional debt, and there won’t be any monthly obligations, but it may mean settling for an older car. Having payments on a modest but more reliable vehicle (new or used) could be in your best interest.
Even if you are going to pay the cost of the car in full, you’ll still need to create a budget and make regular “payments” as you save up. But at least these payments go directly to you, so there are no interest charges. Remember that you’ll have to pay taxes and other fees when you buy the car. Add on about 10% to the cost of the vehicle to factor in this cost.
If you are paying in full, take the car’s total price, plus taxes and fees, and divide it by the number of months you are willing to wait to get it. This sets your monthly savings goal.
For instance, let’s say you want to buy a $5,000 used car. With the estimated taxes and fees, that would be $5,500 total that you’d need to pay. If you plan on buying your car in a year, you’d need to save at least $458 per month to reach that goal.
Financing the purchase
Financing the car does add debt to your bottom line. But as long as you manage the debt effectively, it could be good for your finances even if the cost is higher. Making regular payments on a secured loan (a car loan is a secured loan) and then paying it off completely will improve your credit rating.
Additionally, you can probably buy a later model car that gets better mileage and is safer. However, you will be obligated for that monthly payment for quite a few years, and you need to make sure you can make the payments.
According to credit experts, your down payment should be 20% for a brand-new car and about 10% for a used car. So, you can use that as a guide to plan how much you need to save. For example, if you want to buy a new car that costs $25,000, you want a down payment of at least $5,000. If you want to buy your car in six months, that means you need to save at least $416 per month to make that goal.
That being said, it may be a wise idea to look at the total picture when it comes to financing before you decide how much you need for your down payment. It may be in your best interest to put more money down so you can get better financing and monthly payments that work better for your budget. Here’s how you do that:
Pay attention to your loan factors
Some of the significant factors that will impact monthly payments include the down payment and credit score. Approval for loans is also based on your debt-to-income ratio. Debt-to-income (DTI) ratio compares how much you owe each month to how much you earn. The lower that ratio is, the more likely you’ll be able to get approved for a new loan. The lender will calculate DTI with the new payments factored in, so you generally want your DTI to be around 36% before you apply.
You may want to consider paying down your debt before you apply for a loan.
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Check your credit rating
Before you can determine how much to put down, you need to understand how much your monthly payments will be. Make sure your credit score is good or at least getting better. You can get free credit scores from services such as Credit Karma. Be aware that services like these may not give you the score that the auto lender will look at, but you can at least get an estimate to see where you stand.
It’s important to know your credit score because it will affect the interest rate on your loan. In turn, that will affect your monthly payments. This table provides the estimated interest rates you can expect to pay on new and used cars depending on your credit score:
|Credit score category||Average loan APR for a new car||Average loan APR for a used car|
|Deep Subprime (300 to 500)||14.59%||20.58%|
|Subprime (501 to 600)||11.03%||17.11%|
|Non-prime (601 to 660)||6.61%||10.49%|
|Prime (661 to 780)||3.48%||5.49%|
|Super Prime (781 to 850)||2.34%||3.66%|
Decide your monthly payment and calculate your down payment
Once you know the price of the car and what your credit rating is, you can use an auto loan calculator to see what your monthly payment will be, then you can determine how much you want to save up for a down payment.
You can lower your monthly payments to fit into your budget by putting more money down, or you can reduce the down payment amount you need as long as you can afford higher monthly payments. Don’t forget to add in extra fees and taxes when using the calculator. As with paying in full, you can expect fees to add 10% to your total cost when you finance.
Now that you know how much you need to save, it’s time for some fiscal discipline.
Step 3: Set a monthly auto savings target
The next step is to set a monthly savings target. You simply take the cost that you determined in Step 2 and divide it by the time you have before you want to buy. This gives you the minimum amount you need to save each month to achieve your goal. Now you just need to figure out how to hit that target every month. These tips can help:
- Limit your unnecessary spending.
- Start to examine your buying habits and remember to ask next time you buy something, “do I need this item, or can I put the money in my savings account.” Try to make this a habit so that you begin to question every spending decision.
- Make sure you follow a budget.
The more you can save, the sooner you can buy the car. And while your monthly target may seem like a lot to save, remember that once you get your vehicle, you will have monthly auto loan payments to cover unless you will be buying your car outright. So, setting an aggressive savings target can help you get accustomed to what you will be paying once you get your loan.
Consider setting up a dedicated savings account
Whether you are paying in full or saving for a down payment, you may want to open a dedicated savings account. This is especially true if you find that you have trouble not spending the money you save in your regular savings account. Apps like Qapital can be useful tools for saving money for specific goals.
Automate your savings
You can automate the process of saving by an automatic transfer from your main bank account to the account where you’re saving for your car. This will ensure you don’t forget to put money in savings and will train you for the day when you will have the first monthly payment. When that happens, you won’t have to adjust your budget (at that time) because you will have already put this into practice.
Just be sure to stop the automatic transfer into savings and set up AutoPay for the car payment instead. That means you are far less likely to become overwhelmed by finances and miss payments to your loan or other debts.
Keep on saving
You can continue the good habit of automatically saving each month even after you purchase your new vehicle. It doesn’t matter if you paid cash or are financing. Put a little bit aside each month into your car savings account. Essentially you are creating an account for a down payment in the future and any emergency repairs.
Step 4: Use motivation to reach your goal
Most of us need reminders and motivation to reach our goals. We need to remind ourselves how important the goal is and what will happen when we achieve it. You can motivate yourself with goalposts, visual reminders, and experiences.
Capitalize on an upcoming birthday or holiday
Set the date. Goals need dates and milestones. You should write down how much should be in your account by a specific date, and then finally when you will make the purchase. Birthdays and Holidays are excellent goal post times.
Use images of your car to motivate you
Take a screenshot of the car and put it on your phone, tablet, or laptop. Every time you use one of your devices, you’ll be reminded of your goal. There are also some ‘goal’ apps that give you a countdown timer. The time for your goal will come sooner than you realize.
Take a car for a test drive
Another step to making your dream real is to sit in the car and do a test drive. Imagine that day when you buy the car. Think about this feeling as you put extra money in that account and when you choose not to spend money on other things.
Step 5: Get some extra income
In addition to your regular salary and your consistent deposits to your savings accounts, look for other ways to get extra cash that you can dedicate to this goal.
Contribute any spare cash
Don’t just stop with the automated deposits; when you have spare cash, put that in the account as well. The more money you have in the account, the better. If you don’t use all of that account for a down payment, having an emergency fund is a very wise policy. This practice sets you up to be a saver.
Pick up a side hustle
If you want to supercharge your car savings account, consider getting a side hustle or “gig” and putting all the extra money aside.
Sell personal items you don’t need
You can also see items you no longer use on apps like LetGo or Gazelle if you have old technology. Look for items you no longer use, clothes you no longer wear, and items that kids have outgrown.
Pick up more shifts at work
In addition to gig work and selling stuff you don’t need, consider picking up more hours at work. If your job offers overtime, you can take advantage of that. Again, make sure you put the extra money in your account and don’t spend it.
Other car buying steps to take while you save up for a car
Find your lender
Establish fiscal relationships with a bank or credit union, or other financial lenders. Look to see if your employer has a credit union or if you can join one. See if your credit card company offers loans. Talk to some banks in your area. While you are saving, work to improve your credit rating, especially if you have bad credit. Even if you don’t finance, insurance can be 100% more expensive if you have bad credit.
Fix your credit
While you are saving for your car, or even beforehand, begin to work on fixing your credit. The better credit score you have, the better the rate and terms on any loan will be. Even if you don’t take a loan, you might find considerable savings with your insurance. Credit repair is the process of looking over your credit reports and removing errors that affect your credit score. Before you apply for any loan, you should look over your credit reports. You can repair your credit for free.
Pay off debt
The quicker you can pay off debt, the more you can save to buy a car as well. If you have a lot of debt, you might consider paying it off first before you buy your next vehicle. After you pay off each debt, take the money you save and add it to your car savings account instead.
Paying off debt will improve your debt-to-income ratio, which will make it easier to get approved for an auto loan if you’re planning on financing the purchase. Generally, lenders will ask for a 36% DTI ratio or better. If you’re above that, the loan might cost you more because of higher interest rates.
Paying off revolving debt like credit card debt will also improve your credit score. In fact, a major factor in your credit score is how much you owe on your credit card accounts. Your credit utilization ratio accounts for 30% of your credit score.
Additionally, by paying off your other debts you’ll have more cash flow to make payments on your car.
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Article last modified on May 11, 2023. Published by Debt.com, LLC