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How to save money for a car in 7 steps

A woman buys a car
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A car is more than just a practical means of getting from point A to point B. It’s been a pillar of the American dream for decades.

Deciding what vehicle to buy can involve meticulous research. It’s also important to decide how much money you’ll need on hand before making your purchase.

Here’s what you need to know to jumpstart your car savings plan.

1. Figure out how much car you can afford

Buying a car isn’t a small purchase. The average price of a new one is more than $40,000, according to Kelley Blue Book, an online resource for vehicle valuations. Meanwhile, the average monthly payment on new passenger vehicle loans was $563 in the fourth quarter of 2020, according to data from Experian.

With that hefty price tag in mind, it’s a good idea to determine the amount you wish to save for a down payment. Many lenders require some money up front, and the more you can put down, the lower your monthly payments will be and the less interest you’ll owe.

Also calculate what monthly payment will fit into your budget, factoring in all of your other regular expenses, like housing and utilities.

As a guideline, Edmunds recommends that your new car payment shouldn’t exceed 15 percent of your monthly take-home pay — 10 percent if the car is pre-owned or you’re leasing.

2. Other factors to consider when determining how much to spend

Don’t forget about additional costs such as auto insurance, which typically is paid monthly, every six months or yearly. Know how much insurance your state requires you to carry, and choose coverages and limits you’re comfortable with.

It’s also important to budget for vehicle maintenance, so look for a car with regular maintenance costs within your means, and set aside money in your budget for this purpose. Some manufacturers conveniently include one or more maintenance visits in the purchase price of a car.

Gasoline can be a significant chunk of your monthly expenses, with the national average price at $3.14 a gallon as of September 2021, according to the U.S. Energy Information Administration. The agency’s forecast calls for prices to fall only slightly to about $2.91 a gallon in the final months of 2021. So while buying a car with efficient gas mileage can help you make fewer trips to the pump, it can also save you money.

3. Calculate your down payment

Before you head to the lot to buy a car, take the time to calculate your down payment. This amount will depend on your unique financial situation and the kind of car you want.

“Aim to save between 10 and 20 percent for your car down payment,” says Nishank Khanna, chief marketing officer at Clarify Capital in New York. “Putting down a large down payment will help you reduce the total interest you end up paying on the loan and lower your monthly payment.”

If you’re seeking a newer car, try to put down closer to 20 percent.

“Generally speaking, a larger percentage down payment is recommended for new cars,” Khanna says. “You want to avoid being in a situation where depreciation outpaces your loan value.”

If you’re buying a used vehicle, 10 percent down might be sufficient.

4. Lease or purchase?

Leasing a vehicle means you’ll pay for the ability to drive it for a set number of years before returning it to the dealership. An upside to leasing is it may require little money up front. Common downsides are extra fees if you go over a set mileage limit per year or if you or if you return the car with wear and tear that’s beyond average..

Financing a car means you could own it outright after you’ve made the required number of payments to the lender. Financing often carries a higher monthly payment than leasing, although there are no mileage restrictions.

Whether it’s best to lease or purchase depends on your lifestyle and preferences. Leasing can be better for those who don’t have much money to put down, who enjoy driving a new vehicle every few years and who don’t put a lot of mileage on the car.

Financing often requires more money up front, yet it’s more practical if you wish to keep the car after the final payment is made. It also makes more sense if you don’t want to deal with mileage limits.

5. Establish a savings plan

You may have a vague savings goal in mind, but it’s important to put a precise number on it. With the help of Bankrate’s auto down payment calculator, you can determine how much money you’ll need to save every month to afford a down payment for a car.

Once you have a number in mind, make sure you’re saving enough money every month to meet your goal. That could require tweaking your spending habits, like canceling subscriptions you could do without.

As you tuck away your money, find a smart spot for it. One strategy is to open a savings account at a bank or credit union apart from where you keep your checking account, which may make it less tempting to dip into your savings.

Another option is to schedule automatic transfers from your checking to your savings account on a regular basis. Most banks provide this option, making it convenient for a portion of your paycheck to go straight to savings.

Right now, the best savings accounts pay about 0.4 percent APY and higher. An account with a higher yield will help you build your savings faster.

6. Determine the vehicle you want

Look for a vehicle that’s right for you once you’ve established your price range. Visit car-buying websites to determine a given vehicle’s manufacturer’s suggested retail price (MSRP), and check out dealer websites to compare their prices.

Choosing a more affordable vehicle can help you save for it more quickly. Consider one that’s pre-owned since a brand new car loses value rapidly. According to AAA, a new car loses about 20 percent of its value when it leaves the lot. With that, you could save yourself thousands in depreciation costs by purchasing an older one.

7. Learn how to negotiate a deal

Knowing how much you can spend and getting preapproved for financing before visiting the dealership can help you approach negotiations with a salesperson with confidence.

Stick to your ground during negotiations if the salesperson is quoting you a price on a vehicle that you feel could be lower, based on your research. Getting competing bids from multiple dealerships can help ensure you’ll get the best possible price.

You might take some of the stress out of negotiating when by doing it online. Some dealerships can be contacted via email or text, and some provide an online chat function through which you can talk with a representative about things like pricing.

Buyers who would rather handle the entire process online can purchase from a dealership that allows for electronic signing of paperwork and even can deliver the vehicle to your home.

Bottom line

You can take the stress out of buying a car when you save for a proper down payment and don’t bite off more than you can chew. A bit of research and careful planning can go a long way.

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Written by
Karen Bennett
Consumer banking reporter
Karen Bennett is a consumer banking reporter at Bankrate. She uses her finance writing background to help readers learn more about savings and checking accounts, CDs, and other financial matters.
Edited by
Wealth editor