How to Save Up For a Car
Owning a car these days isn’t just about the freedom of the open road.
After buying a home, owning a car is considered the second largest financial commitment you will make in your life. Whether you’re looking to upgrade to a new ride or buy your first car, you’ll need to do the research and plan out the process, and it all starts with saving.
As you may know, it’s not just about the price of the car upfront. Unless you qualify for a 0% APR loan – which typically only comes around during special dealer/manufacturer events – you’ll likely want to pay a down payment to reduce the amount of money you need to finance. Some experts recommend that you put 20% down on a new vehicle and 10% down on a used vehicle. That may not seem like much at first, but if you’re looking for a few bells and whistles it can add up – 20% on a $25,000 car comes out to $5,000 up front, before factoring in any dealer fees.
To help you unpack this big financial decision, we’ve outlined some strategies to help you save for a car that meets your needs, is within your budget, and has features to make your commute and any road trips more enjoyable. Let’s dive in.
Do your research
If you’re the type of person that grew up with posters of sports cars on your bedroom walls, you likely have some idea of what you want, even if you know that the Ferrari on your childhood wall is currently an unrealistic goal. It’s also likely that you may not know exactly what car you want, which can make an already stressful process seem much more daunting.
Doing some homework before stepping foot into a dealership won’t just save you time and money, it can also save you potential headaches down the road. To begin with, make a list of things that you want in a car. Start with the practical ones, like safety, fuel economy, reliability, and storage space. Read reviews for top rated models, ask your family and friends about their experiences with certain manufacturers and models.
If you do your homework before heading to the dealership, you’ll position yourself to make a good purchase no matter what.
Buying or leasing?
This is one of the most common questions when it comes to buying a car – and honestly, either one of these can be an option depending on your circumstances. By purchasing a car, you’re building equity (and credit history), which can help you out in the long run. Once your car is fully paid off, you can say goodbye to monthly payments, and if you’re not underwater on the loan – owing more on the loan than the car’s current value – you might be able to trade it in towards a newer, nicer ride.
That said, cars are depreciating assets – the second you drive a new car off the lot, its value decreases, and steadily declines from there. Unless you qualify for a 0% APR loan, by the time you pay off your car loan, you’ll have paid far more than the car’s original sticker price, let alone the new value after depreciation. Which is why for many, leasing is a more sensible option, since you’d only be paying for the usage of the car without taking a depreciation hit.
If you choose to lease, you’ll have monthly and annual mileage limits, which can be a good thing if you don’t drive much anyway. A lease agreement that includes 10,000 miles each year, after all, may be cheaper than one for 15,000 miles. In that sense, leasing is more sensible for those with a short commute than it is for people who commute between cities or love long road trips.
Of course, leasing (usually) means giving the car back at the end of the agreement, which means that you’re not building equity, but since you’re also not on the hook for the full value of the car, you’ll likely have a lower monthly payment.
Notice we said you usually don’t have to give the car back when your lease expires. That’s because most dealers offer a buyout option at the end of the lease. If you lease a car and fall in love with it, you’ll have the option to buy the car at the end for the residual value of the car. That should be significantly less than the sticker price when the car was still brand new, since you’d have just spent the last few years driving the car around. It’s not always a good idea – sometimes the residual value is higher than the actual value of the car – but if you love the car and your finances allow it can be a sensible decision.
New or used?
Conventional wisdom would suggest that a new car would be more expensive than a used car. If you’re only comparing sticker prices, which makes sense if you’re paying cash, the used option will almost always be cheaper. That isn’t a reality for most car buyers, however, as an estimated 85% of car purchases are done through financing.
The two factors that muddy the waters and sometimes make used car purchases a more expensive option are maintenance costs and interest rates.
The difference on the latter can be pretty shocking: according to Business Insider, the average interest rate for a new car for the first quarter of 2021 was 4.12%, compared to 8.70% for a used car. Let’s say you find a model you like with a $25,000 sticker cost. If both loan terms are for 60 months, the new car will cost $464/month, not accounting for dealership fees. That same car, but used and $5,000 less, will cost $410/month due to higher interest.
That’s not an insignificant difference, but maintenance costs can wipe that out and then some. New cars come with manufacturer warranties, so if something breaks (assuming it’s not your fault), the manufacturer may pay for most or all of the cost to repair. Any repairs not covered by the warranty, however, may be more expensive than they would be on a used car, which is why insurance on a used car is generally less expensive than on a new one.
If you still can’t decide between buying new or used (which should probably depend on what car you’re looking for) there is a third option that splits the difference: certified pre-owned (CPO). These cars have been dealer-inspected and manufacturer-sponsored.
CPO cars go through thorough inspection and have similar warranties that a new car would have, albeit less comprehensive. They’re not as new as a new car, but are more reliable than a used car, with a price point somewhere between.
If your heart is set on a new car, one other thing to consider is shopping late-model new inventory. Let’s say your local dealer just received a bunch of 2022 models – they may have a new 2021 (or even a 2020) model on the lot that still carries all of the warranties and manufacturer incentives that its 2022 counterparts have. Typically, dealership staff will be very willing to negotiate on these models as they’ll make way for more of the new model year inventory.
Don’t judge a book by its cover
Just because you did a double-take when that convertible drove by your window doesn’t mean that’s the type of car that you should be driving, even if you love its looks. Or maybe you grew up wanting a truck, but live in a city with narrow roads and limited street parking.
Don’t just start with the type of car you want and only cross-shop similar cars. Depending on your situation you might want to expand your horizons and test drive different types of cars. If you’re looking for a sedan, you may find that you get all the features you want and more practicality with a crossover. If your heart is set on a pickup truck, you may be able to find most of what you want in a SUV.
By expanding your search criteria, you’re increasing the chances of finding a bargain or potentially a car that you didn’t expect to fall in love with.
Figure out what to do with your old ride
Say you’ve found a car you love at a price you can stomach, but maybe you don’t have a lot of cash available right now and can’t stomach a high monthly payment. If you already own a car – even if it’s not in great shape – figure out how much it’s worth and negotiate with the dealer to maximize its trade-in value.
If you already own a car, then working out how much you could get for your current car (either as a trade-in or selling it independently) is also a good place to start. This is the beginning of the process when you can still entertain ideas about the car of your dreams while keeping an open mind that you begin to fill with verified facts from sources that you trust.
Tip: Use online appraisal tools to provide an estimate of your car's value. This way, you’ll know how much it could add to your savings fund.
Calculate a car budget
Rather than starting with the cost of the car you love, working out what you can afford and then figure out what your budget allows might be a better move. Think of it as writing down your shopping list before you head out to buy groceries. This way, you won’t be lured into buying unnecessary features that you weren’t anticipating.
As mentioned above, the question “how much should I spend on a car?” goes far beyond sticker cost. Between trade-in value, dealership negotiation, interest rates, and you might actually be able to have lower monthly payments for a more expensive car.
The general rule of thumb is to aim for the lowest monthly payment possible, but that’s far from the only cost that you should anticipate. Be sure to budget for maintenance costs and repairs that aren’t included, and factor in the cost of an insurance plan.
Gas isn’t cheap, either, so you might want to consider fuel economy as well. That doesn’t mean you have to forgo a sportier car or pickup truck, but buying a gas-guzzler will cost you a lot more in fuel costs in the long run.
Factoring “on-the-road” costs, will give a far more accurate overview of the real cost of owning a car. Now that you've done your research and worked out a budget, you’ll know what you need to save for both the down payment and your monthly installments.
With all of that in mind, one commonly-cited piece of advice is that your car-related costs (including gas and maintenance) shouldn’t exceed 20% of your paycheck.
Start saving with N26
Now that you know the numbers, you should start saving for the deposit and the monthly installments. Maybe you already have enough for the down payment or the right amount left over each month to cover your car payments. If this isn't the case, don’t sweat it, you’ll get there in time by making a few changes to your spending habits.
Simple cost-cutting measures like getting rid of services you don’t really use or cutting back on take-out can really add up over time without feeling like you’re really sacrificing too much. If you have the time and energy, picking up freelance work can also help you get behind the wheel faster.
Looking to save for a down payment or set aside money each month for your car-related expenses? Spaces can help you do just that, by setting money aside for your dream car right from the N26 app with just a few swipes. All that’s left to do is open your N26 account and start putting together your next road trip playlist.
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