Buying a car is a big investment that often requires months of planning and saving. But before you start budgeting, it can be helpful to understand the car buying process and your options for financing a vehicle.
In this guide, we’ll help you come up with some strategies to save money for a car, so you can comfortably afford a new ride. If you’re ready to buy a car, an auto loan may be a great option for you. Easily compare auto lenders using the tool below.
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1. Establish Your Budget
First, you should figure out how much money you need to save. To come up with this number, you will need to consider what car you want, how long you have to save, the amount of money you can realistically save, and what additional costs you might have to pay.
Decide What Car You Want
As you create your budget, think about the type of car you ideally want to buy. This decision can help determine whether you’re saving for a down payment or the entire vehicle. Here are the main options you have when buying a car:
New Car
Buying a new car can be very expensive, even for models with a low MSRP. Most dealerships ask for a down payment of at least a few thousand dollars, and monthly payments can vary significantly depending on the length of your loan, your credit, and your down payment.
If you want to buy a new car and finance the purchase, think seriously about how much you can afford to spend on your monthly payment. If you only have an extra $200 at the end of each month, for example, you’ll want to consider that when shopping for cars and loans.
Used Car
Used cars are generally more affordable than new cars, and you can still find a car that’s in great condition. A used car might be a good option if you don’t have time to save a significant amount of money, or if you need a car quickly.
If you want to purchase a car in cash, a used car is usually a better choice. You don’t have to save as much money, and you can own the car debt-free, without a monthly payment.
Lease
You should also think about leasing a vehicle, especially if you want a brand-new or almost-new car. Leases require a down payment and monthly payments like new cars, but you only keep it for a few years. Even though you won’t own the car outright, leases can make higher-end vehicles more affordable to drivers on a budget.
However, leases have restrictions that new and used cars don’t. For example, you can only put a limited number of miles on a leased car during your ownership. You also need to keep the car in near-perfect condition, otherwise you might get charged for excessive wear and tear when you return the vehicle.
How Long You Have to Save
Next, consider how long you can save for a new vehicle. If you need a new car next month, then you’ll probably be shopping with a relatively low budget. However, if you can consistently save for the next year, you can probably increase your budget significantly.
Your Credit
If you plan to finance your car, your credit score will impact your loan terms and interest rate. Because your interest rate affects your monthly loan payments, you should consider this when setting your budget. To get a sense of what interest rate you can qualify you, shop around for loans and consider getting pre-approved.
Additional Costs
When you buy a vehicle, it’s not just the down payment or the monthly loan payment you have to make. You should also factor in sales tax, insurance premiums, repair costs, excise tax, and other fees that come with car ownership.
2. Review Your Financing Options
There are a few ways to finance a vehicle purchase. Before you start car shopping, it’s a good idea to figure out how you will buy the car.
No Financing
The first option is no financing, where you buy the car outright. What you save is the amount you can spend on a car. With this option, you won’t be attached to a monthly payment, and your car will be legally yours. However, buying a car with cash usually limits your vehicle choices.
Financing Through a Dealership
Many dealerships partner with local and national lenders to offer auto loans to customers. This arrangement can be convenient because everything goes through the dealership. Plus, there’s staff who can answer questions and help you with the paperwork.
However, the dealer may not be able to offer you the best loan terms for your situation. Be sure you’re shopping around for the best rates and offers before accepting one.
Financing With a Bank or Credit Union
Many banks and credit unions can also provide auto loans. If you plan to buy a car from a private seller, rather than a dealership, this is usually the best option. Before you buy a car, consider getting pre-approved for a loan so you know how much you can afford to spend.
Financing Through a Private Lender
Financing through a private lender, like your parents, might be possible. While this option isn’t available to everyone, getting an auto loan from someone you know often means lower interest or interest-free payments. Borrowing money from loved ones may put a strain on these relationships, so be sure you can pay them back before agreeing to borrow money.
3. Determine the Trade-In Value of Your Current Vehicle
If you own a vehicle already, trading it in will give you more money to put into a new vehicle. Some dealerships offer trade-in deals where they’ll buy your car and apply the purchase price toward the down payment on a new or used car.
Dealerships usually offer less money for used vehicles than a private buyer might, but if you plan to buy a new car from the dealership, it can simplify the process and save you time.
To determine the value of your existing vehicle, you can use a tool like Car and Driver’s by clicking here. You can use the online calculator to find out how much your car is worth based on the year, make, model, and condition.
4. Set Up a Personal Savings Strategy
Once you know your car buying budget, purchasing plan, and trade-in value, you can start saving. Follow these steps to set up a personal saving strategy:
Establish a Monthly Budget
The first step is to create a realistic budget and stick to it. Look at your monthly credit card statement and see where you can cut back, whether it’s subscriptions, gym memberships, restaurants, or monthly entertainment. The more you can put aside each month, the sooner you’ll be able to afford a new vehicle.
Create a Separate Savings Account
Opening a separate savings account makes it easy to see how fast your money is growing. It also means you won’t be tempted to use the money for something else. Commit to saving a specific amount of money each week or each month and transfer the money into your savings account.
Think about how much you want to save and your time frame to determine how much to put aside. For example, if you want to save for a down payment of $6,000 on a new vehicle, expect to put $500 a month in your savings account for a year.
Consider Getting a Side Hustle
Getting a temporary side hustle can increase your income, allowing you to put more money away for your car. This isn’t an option for everyone, but it’s something to consider, especially if you want to buy a car soon. You can find opportunities to earn cash online, or you could start a part-time job to get the money you need faster.
5. Get Pre-Approved
If you plan on taking out a loan to buy a vehicle, find the lender you want to use and get pre-approved. Getting pre-approved for a loan tells you how much money you can get approved to borrow, and what interest rate you’ll pay.
To get pre-approved, the lender will likely ask for information about your income and your credit score. You might also have to show proof of income, like a pay stub or your most recent tax return.
6. Purchase the Vehicle
Once you’ve saved up enough money, it’s time to purchase your vehicle. Private sellers and some dealerships may be willing to negotiate with you on the price of the car. Once you arrive at the final number, you’ll complete the transaction and drive away in your new car.
If you choose to finance your vehicle or lease a car, make sure to follow through on your payment commitments. Make it a priority to pay on time each month and notify the lender if you run into financial trouble. It’s always better to communicate with your lender than skip payments, which can hurt your credit score.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
Source: www.caranddriver.com