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Buying a car isn’t cheap. The average new-car loan is more than $36,000, and the average used-car loan costs more than $20,900, according to Experian data.
As you start to explore your car options, it’s a good idea to first determine how much you can afford. Start by reviewing your monthly budget to see what works with your cash flow. Then compare cars in your price range.
To lower your monthly financial obligation, you’ll probably want to contribute a down payment by trading in your old vehicle, paying part in cash or a combination of both. As a general rule, aim to make a down payment equal to 20% of the car’s value down for a new car, and at least 10% down for a used car.
Why should I save for a car?
The more money you’re able to put into a down payment, the less you’ll need to borrow and the lower your monthly payments could be. Having lower monthly payments can allow you to put more money into other obligations, like your rent or mortgage, student loans or credit card debt.
A larger monthly payment may be harder to afford if a financial emergency arises. And if you skip your car payment, you may fall behind on your auto loan, which could lead to default and repossession. In turn, that can hurt your credit and ability to take out loans in the future.
If you’re able to pay cash for your car, you won’t have to take out a loan at all.
How to save money for a car
If you’ve recently had car troubles and need a new one right away, you may not have as much time to save as someone who is just starting to think about buying a new or used car.
But that doesn’t mean you should buy a car on a whim. Here are a few ways you can save for a car.
1. Set a budget
It’s hard to gauge what car you can afford if you haven’t checked the numbers yet. Go over your income and monthly financial obligations, including your rent or a mortgage payment, utility bills and student loans.
You may also want to track your expenses to get an idea of how much you’re spending on things like groceries, eating out and shopping.
Calculate how much room you have in your budget for a car payment. This will help you determine how much money you should save for a down payment. A common rule is that you shouldn’t spend more than 15% of your monthly net income on a monthly auto payment.
2. Save automatically
If you haven’t set up a savings account yet, that may be a good place to start. When you’re setting up a savings account for the first time, try to find a high-yield account that offers a competitive interest rates and low fees.
Having a savings account that is separate from your checking account can help you keep track of exactly how much money you have for a down payment for your car. One bank account may make it more difficult to keep track of your car savings as money comes in and out to pay for other things.
When you set up a standalone savings account, you can also set up automatic contributions for when you get paid, which could make it easier to keep track of your new funds. Doing so can help give you a clearer picture on what you can afford.
You could also try a money-saving app to help automate your savings.
3. Get a side job
If your full-time job just pays the current bills, you may be able to take on some extra work to start saving for a car. Getting a side job can help you save extra.
A side job may include selling homemade goods online, working as a virtual assistant or delivering someone’s groceries. Earning a little extra cash can go a long way, giving you the chance to put more toward a car, borrow less money and possibly lower your monthly payment.
4. Cut out extra expenses
If your current budget doesn’t give you much room to save for a car, see where you can lower your expenses — or cut them out completely. That doesn’t mean you have to permanently go without something, but it may make sense to trim costs for a set period so you can save.
For instance, it may help to stop using your credit card for certain purchases you feel aren’t truly necessary. Try limiting your credit card spending to things like gas and groceries for a few months. If you’re not using your gym membership, cancel it for now and hit the pavement around the neighborhood for free instead.
5. Trade in or sell your old car
Trading in your vehicle to help fund your next car purchase is often a good option to lower the overall amount you’ll owe on your new vehicle.
To get the most money, you’ll want to compare what different dealers will offer you for the car. Research what your car is likely worth on sites like Edmunds and Kelley Blue Book to see if your trade-in offer seems reasonable.
But be cautious about negative equity on your current car before you decide to trade it in. Negative equity means you owe more on your car loan than what your car is worth.
And it’s a good idea to research selling the car yourself to a private party since it could help you earn more money from the sale.
If you have the time and resources to devote to saving for a new car, it’s often a good idea for your finances. Spend as much time as you can saving now so you can borrow less later.
While saving for a new car can feel a bit overwhelming, you do have options to get started. Break down your goal into measurable targets, and you can be on the road to savings.