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Do you spend more time with your auto repair person than you do with your family? Do you park three blocks from work so your coworkers won't see your clunker? If these situations sound familiar, it's probably time to start shopping for a new car. First, though, you need some cash for a down payment. To save for a new car, follow these five steps—and you'll be driving in style in no time.
Calculate What You Can Afford
To start saving for a car, first calculate your monthly income and expenses to figure out how much you can afford to spend on the vehicle each month. Keep in mind that besides the monthly payment, you'll have other car-related costs, such as gas, repairs and car insurance. Be sure to build those into your estimates.
It's also important to make sure you can handle a car payment without getting into too much debt. Lenders will consider the ratio of your total monthly debt payments to your total monthly income (your debt-to-income ratio, or DTI) when reviewing your loan application, and generally they don't want to see debt taking up more than 40% of your income. If you already have a lot of debt and a car payment could push you over that ratio, work on reducing debt before you start saving for a car.
If you have a specific make and model of car in mind, visit auto dealers' websites to get an idea of the total price for the car you want. Then use an auto loan calculator to estimate what your monthly car payments will be based on the price of the car, your down payment, current auto loan interest rates and length of the loan.
The bigger the down payment, the better. A bigger down payment will help you get better loan terms, and it means you can borrow less money, both of which reduce the total amount you'll pay over time. At minimum, aim to make a down payment of 20% of the price of the car. Auto loan calculators will show you how different size down payments affect your monthly car payments and can help you choose the right car payment.
Decide Whether You'll Lease or Buy
If you're in the market for a new car, you've probably seen ads for leased vehicles at amazingly low prices. Paying $200 or less per month for a brand-new vehicle seems pretty tempting. But before you sign on the dotted line, make sure you understand how leasing affects your payments compared to buying.
While leasing does offer lower monthly payments, over time it costs more than owning a car. That's because today's new cars are built to last 10 to 12 years or more. If you buy a car using a four-year auto loan, you could be driving your car for eight years or more with no car payment. Unlike leasing, which is essentially a long-term car rental, you'll also own the car at the end of the term.
Leases restrict your annual mileage, so if you drive more than 10,000 or 12,000 a year, depending on the dealer, you'll end up paying hefty per-mile fees on the overage. When the lease is over, you're on the hook for any damage to the vehicle, and if you need to exit the lease early, you'll pay a sizeable termination fee. Ouch!
Of course, if you are more concerned with keeping monthly payments low than with owning the car, if you only need a vehicle for a short time, or if you're simply set on driving a new car every few years, a lease could be right for you. Learn more about leasing versus buying a car to figure out which best fits your needs and wants.
If you decide to lease, you'll typically have to put down a few thousand dollars at the start of the lease. Visit dealer websites to see lease options and get an idea of how much you'll need to save for your initial payment.
Make a Budget to Limit Spending
Do you follow a budget? If not, now is a good time to start. With your eyes on the prize (a new car), you'll be more motivated to keep your spending in check. Start by reviewing your expenses for the past few months. Separate them into fixed costs that you have every month (like your rent or mortgage, insurance and cell phone bill) and variable costs that you can control, such as entertainment, eating out or buying new clothes.
Then make a plan to cut back on expenses wherever you can. For example, you might want to review your memberships and subscriptions, since these costs can quickly add up (do you really need Netflix, Hulu, Amazon Prime Video and HBO?). Reduce utility costs by setting your thermostat a little higher or taking shorter showers. Buy groceries and cook at home instead of eating out or ordering delivery. (Your waistline as well as your wallet will thank you.) Need motivation? Use a photo of your dream car as your screensaver to remind you of your goal or tuck one in your wallet to help prevent impulse spending.
For more ideas, read about different ways to set a budget and tools to help you stay on track.
Open a Savings Account
If you don't already have one, opening a savings account can help ensure you don't squander the money you're trying to save for a car. (Sometimes it's hard to ignore money that's sitting in your checking account.) You may even want to open a dedicated savings account just for this purpose. Seeing your balance grow each month, bringing you closer to your automotive goal, will help motivate you to save even more.
A good rule of thumb is to put 20% of your after-tax income into savings each month. It's easier to save money if you automate the process. If you ask, some employers will direct-deposit part of your paycheck into your checking account and part of it into a savings account. Even if your employer doesn't offer this option, you can have your bank set up an automatic deduction from your checking account into your savings account. Schedule the deduction right after payday so you aren't tempted to spend the money.
Improve Your Credit Score
Whether you plan to lease or buy your car, make sure your credit score is the best it can be before you visit an auto dealer. Improving your credit score will help you get better auto loan or lease terms, which will lower your monthly payments. Start by getting a free credit report and reviewing it carefully. If you find any mistakes, dispute them with the credit report agency and make sure they get corrected.
Could your credit score use some help? To improve it, be sure to pay all your bills on time and focus on paying down credit card debt before you start saving for your new car. Avoid opening any new credit accounts or closing any old ones before you apply for an auto lease or loan. Learn more about how credit scores affect car loans.
Enjoy the Ride
Saving for a new car doesn't have to mean living on instant ramen for the foreseeable future. Follow the simple steps above and saving the money you need should be practically painless. Before you know it, you'll be driving your dream car off the lot and asking your friends, "Want a ride?"