Publish Date - November 03, 2022
Author: Moses Mwangi
How to Save for Your New Car’s Down Payment
Saving for a down payment is a great idea, regardless of your credit score. The more money you put into a down payment, the less you will need to borrow and the lower your monthly payment could be.
Saving for a down payment is a great idea, regardless of your credit score. The more money you put into a down payment, the less you will need to borrow and the lower your monthly payment could be. Lower monthly payments can help you put more money into other obligations, such as your rent or mortgage, credit card debt, and student loans. In addition, making a down payment saves your cash on interest charges, which is particularly helpful for bad credit borrowers.
Whether purchasing a new or used car, you may need to save money to fund the expense. Here is how to save up for your next new car for a large enough down payment.
1. Budget for car-related expenses
Setting and sticking to a monthly budget can help you save for a car more quickly. Follow the 50/30/20 budget rule, which entails spending 50% of your income on essential needs, 30% on non-essentials, and the remaining 20% on your savings.
With an idea of how much you can spend each month, determine a down payment you can comfortably afford with the shortest term possible to save the most on interest charges. Generally, you should not spend more than 20% of your monthly net income on auto payments. Remember to budget for gas and full coverage auto insurance, too, which is needed on all financed cars.
If your credit score is a little bad, it’s usually a good idea to choose a more conservative car that you can comfortably afford, such as Ford Mustang, Mercedes GL, or Audi A8. This can help you lower the risk of biting off more than you can chew and work on your credit score.
2. Open a high-yield savings account
It’s a good idea to open a separate account to avoid being tempted to dip into your car savings for other purposes. Research various banks and credit unions in your region and figure out what types of savings accounts they provide.
Look for savings accounts with a high annual percentage yield (interest). Most savings accounts offer between 0.5% and 1%, so anything more than that can be perfect for your savings. In addition, it doesn’t require any effort to earn that extra cash since it’s often added to your savings automatically.
3. Trade in or sell your used car
If you want to replace your old car, you can sell or trade it and put the cash toward your next car. Depending on your current car value, the money you get from trading it can significantly reduce the cost of a new car.
It’s good to compare what different dealers will offer your car to help you get the most money. Research the possible worth of your vehicle on sites such as Kelley Book and Edmunds to see whether your trade-in offer appears reasonable.
Be cautious about negative equity on your current vehicle before you trade it in. Negative equity means you owe more on your auto loan than your vehicle is worth. In addition, selling the car yourself to a private party is a good idea since it might help you earn more for the vehicle sale.
4. Automate your savings
Setting up automatic direct deposits can help you avoid spending all your monthly income and save money for your car purchase. You can do this by setting up automatic transfers from your checking account on your bank’s website or using a trusted third party.
Having your savings deposited into your account automatically can be a perfect way to set money aside for a down payment. Some budgeting apps also offer savings features making it much easier to grow your savings over time.
Earning extra money can go a long way in giving you a chance to save more towards a car, borrow less money and probably reduce your monthly payment. However, ensure the hustle is legitimate and worth your time before you commit.
5. Reduce your expenses
If your current budget doesn’t allow you ample space to save for a vehicle, figure out where you can reduce your expenses or cut them out completely. That doesn’t necessarily mean you should permanently go without something, but it’s worth trimming some costs for a given period of time.
For instance, it might help to halt using your credit for certain purchases you feel aren’t very necessary. Try limiting your credit card spending on things such as cable, groceries, or gas for a few months. Furthermore, cancel your gym membership for now and instead take a walk around the neighborhood and put this extra cash into your car-saving fund.
6. Look for a side hustle
A temporary or long-term side job might help you get the money you need for a down payment on a car. You could freelance as a writer, sell homemade goods online, deliver groceries, work as a virtual assistant, or sell your unwanted books or other items online to get the extra cash to put toward your new ride.
7. Cut down some subscriptions
Reduce some monthly paid subscriptions, especially those you don’t use often. Consider pausing your accounts until you boost your savings or cancel them completely. Try only to pay for what is necessary at the moment.
8. Unsubscribe from retail emails
Are you the kind of person who can’t resist a good deal? Consider sending those retail advertisement emails from your favorite system stores to the junk folder. Although it might be difficult to resist a deal of the day on some brand-new clothes, shoes, or books, now it’s time to focus on a new car.
Buying a new car is a considerable investment, and one needs to prepare for it. Each part of the process is essential, including the steps you make before making the purchase, such as budgeting for what you can comfortably afford, finding the right lender for your credit situation, and determining the kind of car you want. However, the most crucial step is learning to save for a car by putting enough funds away for a vehicle purchase and maintenance. Spend utmost time saving now so that you can borrow less later.