The average new car loan amount is up $4,703 from last year, and used car loans have increased by $4,487, according to credit reporting company Experian. Thanks to inflation and scarcity, it now takes more money to purchase a vehicle than at any other time in recent history. This means careful planning is required to save what you’ll need.
Calculating your downpayment and monthly costs
To determine if you can afford the car, truck, or SUV of your dreams, visit local dealer websites to see what it costs to buy a vehicle with your preferred features. Then you can input that price into an auto loan calculator. You’ll find one on most bank websites and sites like NerdWallet and Bankrate. You should assume a 20% down payment on a new car and a 10% down payment on a used vehicle. Experian found the average monthly payment for a new car in Q2 ‘22 is $667, while the average monthly payment for a used car is $515.
Many financial experts recommend shopping around for auto financing as you would a vehicle. Talk with your bank, visit sites like LendingTree, and explore what’s available from a credit union if you have access to one. The latter traditionally offers very competitive loans. Once you’ve done your homework, ask a dealer if they can provide a better rate.
Budgeting for a vehicle
The 50/30/20 method is a great way to ensure you’re not stretching your budget too far. If you’re unfamiliar with 50/30/20, those are the percentages you should allocate to needs, wants, and savings/debt repayment.
To determine where the monthly expense of a vehicle should come from, ask yourself this question: do you have a reliable car right now? If the answer is no, you obviously need something better. If the answer is yes, you merely want something nicer. Will the 30 - 50% of your monthly earnings allow you to carry an auto loan for the vehicle you’re eyeing? And can the 20% you’re saving help you accrue a down payment in a reasonable amount of time? Or should you, perhaps, reset your expectations?
Remember, in addition to a down payment, you’ll need to cover the upfront costs of tax, title, registration, and other fees. You’ll also have ongoing monthly, quarterly, and annual expenses (gasoline, maintenance, and insurance).
Getting your spending under control
Once you’ve figured out your monthly 50/30/20, it’s easy to take a closer look at your expenses and decide what you can cut or keep. Going through debit or credit card statements can help you identify frivolous purchases and recurring charges you can eliminate. Signing up to receive email alerts from the money management site Mint can also help you see just where your money is going. Saving up for a down payment, and being able to make the monthly payments, may require you to make some difficult choices. You might have to say goodbye to streaming services, nights out, or vacations.
Setting up a separate savings account
The advantage of saving for a down payment in an account that doesn’t have a debit card is you won’t touch what you’ve set aside. Many banks allow you to set up automatic deposits, so you can set it and forget it until you’ve reached your goal. Allio has a feature that allows you to save specifically for a car. And with our macro investment portfolio, you could earn more than the 0.13% interest you’d receive from a typical savings account.
Selling or trading in your current vehicle
If you currently have a vehicle in good working order, this could help you reduce the amount you’ll need to save for a down payment. Use the valuation tools on the Kelley Blue Book and Edmunds websites to help determine the current worth of your automobile.
In most cases, you’re likely to make more money if you sell your vehicle directly to a private party. Before you go this route, however, it may be worth chatting with dealers. Given the shortage of used cars in today’s marketplace, they may be willing to pay you more for your trade-in to increase their lot’s inventory.