How to Save up for a Car in 5 Easy Steps


After hitting record highs in 2022, new and used car prices are beginning to fall. Edmunds reports that the average price of a used car has fallen by 5% from its peak, while late-model used cars have dropped more than 15%.

If you’ve decided the time is right to buy a new or used car, you may want to save money for a down payment to reduce your costs. Fortunately, it might take less time than you think. And, meanwhile, car prices may drop even further as the supply chain stabilizes, and more cars become available.

If you’re revving up to buy your dream car, here are five straightforward steps you can take right now to set you on the right track.

woman sitting in new car

Step 1: Understand the Cost of Your New Car

Find the Right Car for You

Your journey to save money for a car starts with one fundamental decision – the type of car you want. This choice depends on numerous factors such as lifestyle, family size, daily commute, personal preference, and budget. Are you dreaming of a brand new car with all the latest tech, or is a used car, which might be equally reliable but less costly, more in line with your financial situation?

Choosing between a new or used car is an important consideration that impacts not only the car’s initial price but also ongoing expenses like maintenance, insurance, and fuel costs. A brand new car might come with a higher price tag but could save you more money in the long run with fewer repair needs. Conversely, a used vehicle may be more affordable upfront but could require more frequent maintenance.

Calculate the Cost

Visiting dealers in your area and browsing car ads should give you an idea of the cost of a car. If you’re purchasing a new car, you can visit the brand’s website and custom design the new vehicle of your choice with the trim package and colors that you want. You’ll see the MSRP, but remember, you may be able to negotiate a better deal.

Rely on sites like Kelley Blue Book and Edmunds to see the asking price for a used car that matches your wish list.

Remember that the sticker price is only one part of the equation. Consider other car-related expenses, such as auto insurance, registration fees, and sales tax if you’re considering an auto loan.

Step 2: Evaluate Your Current Financial Standing

Assess the Value of Your Current Car

Knowing the value of your current car is crucial to fine-tuning your savings goal as you plan to save for a car. Again, check Kelley Blue Book and Edmund’s for an estimate of your vehicle’s value based on factors such as model, age, mileage, and condition.

If you can trade in your old car for a good price or sell it privately, the proceeds can substantially reduce the amount you need to save for your next car. Remember, every bit of income helps, and leveraging what you already own can bring you closer to your goal.

Determine Your Monthly Payment Capacity

Understanding how much you can afford to spend on monthly car payments without disrupting your financial stability is a critical part of your financial evaluation. Analyze your monthly income and expenses. This should include your housing costs, groceries, utilities, insurance, personal expenses, and any existing monthly loan payments.

Your new car payment should not overstretch your budget or force you to sacrifice other financial obligations or goals. As a rule of thumb, your total monthly expenses, including loan payments, auto insurance, and maintenance, should not exceed 20% of your monthly take-home pay.

Your Credit Score Plays a Significant Role

Your credit scores serve as a measure of your creditworthiness, and lenders use it to determine your interest rate. A higher credit score can earn you lower interest rates, which directly translates to lower monthly payments.

Before you apply for a car loan, check your credit report from each of the three major credit bureaus. Ensure all information is accurate, and if it’s not, take steps to correct any errors.

If your credit scores need improvement, consider strategies to boost it, such as paying down credit card debt to improve your credit utilization rate, and making all credit accounts’ payments on time. Before you purchase a new car with a car loan, try not to open other new credit accounts as this can lower your credit score.

Step 3: Craft a Personalized Savings Plan

Determine Your Down Payment

Your down payment is a major factor when you buy a car. This is the amount of money you’ll pay upfront, and it significantly influences your future monthly car payments. A larger down payment can reduce your loan amount, leading to lower monthly payments and possibly better interest rates. This ensures you have enough money to afford the car you want.

So, how much should you aim to put down? While the amount varies based on personal finances and the cost of the car, aiming to put down around 20% of the purchase price is a good benchmark. Take a hard look at your savings and decide the down payment amount you can comfortably afford without draining your emergency fund or sacrificing other financial goals.

Adjust Your Budget

With a savings goal in place, the next step is to adjust your monthly budget accordingly, allocating a specific portion of your income to save for a car. You may need to cut back on discretionary spending habits, such as dining out, subscriptions, or other non-essential purchases.

Create a new category in your budget for “Car Savings.” Allocate a specific portion of your monthly income to this category, ensuring it aligns with your down payment goal and the timeline you’ve set for yourself. Make a commitment to stick to this plan, understanding that short-term sacrifices can lead to long-term gains.

If you’ve recently paid off an auto loan and are driving your car free-and-clear, consider continuing to put the monthly amount of your prior car payment into a savings account for a down payment on a new vehicle.

Automate Your Savings

To streamline your savings process, consider setting up automatic transfers from your checking account to a dedicated, high-yield savings account with your bank or credit union. You can make this transfer a percentage of every deposit or a fixed monthly amount.

Many financial institutions also offer the option to automatically transfer funds from your checking account to your savings account immediately after each paycheck. This “pay yourself first” strategy can be a powerful savings tool, as it essentially makes your car savings an unavoidable monthly expense.

Step 4: Boost Your Income

Explore Additional Income Opportunities

While cutting back on spending can significantly help you reach your savings goal, sometimes it may not be enough. Fortunately, you can also look for ways to boost your income.

The gig economy offers a wealth of opportunities to earn extra money outside your regular job. This could be anything from freelance work in your field of expertise, delivering food, tutoring, dog walking, or selling unused items online. Even a few hours of work each week can translate into significant earnings over time.

To make the most of this strategy, direct all the additional income you earn from your side hustle directly into your car savings account. You’ll accelerate your savings progress and get closer to your car purchase goal faster.

However, while a side hustle can boost your income, remember that it also requires a commitment of your time and energy. Before you start, ensure it’s something you can manage alongside your primary job and personal responsibilities. Find something you enjoy and can sustain over time, ensuring it doesn’t negatively impact your work-life balance.

Step 5: Prepare for Additional Costs

Account for Additional Expenses

When it comes to car ownership, the purchase price is just the tip of the iceberg. A multitude of other expenses are associated with owning and operating a vehicle, and it’s crucial to factor these into your budget.

Car insurance is one of the first additional costs to consider. The rate will vary based on your age, driving record, the car model, and where you live, among other factors. Be sure to get a quote before making your car purchase to avoid any surprises.

Maintenance and repair costs are another essential factor. While brand new cars generally come with a warranty period, used cars might require more frequent maintenance and potentially more significant repair costs.

Additionally, don’t forget to factor in fuel costs. Depending on your commute distance and the car’s fuel efficiency, this can be a considerable monthly expense. Fortunately, if you are trading in an older vehicle for a newer car, you may find your fuel efficiency increases, which means lower gas costs.

Lease or Purchase?

If you’re considering a brand new vehicle, you’ll have to decide whether you want to lease or purchase the car. Both options come with advantages and disadvantages. Leasing typically allows you to drive a newer vehicle for a lower monthly payment, but you won’t own the vehicle at the end of the lease period. Also, leases typically limit your driving to 10,000 or 12,000 miles per year or you may be charged for every mile beyond that limit.

On the other hand, buying a car means it’s yours once you’ve made all the payments. If you are a person who takes care of your vehicle and will maintain it after you’ve paid off the loan, you could drive around with no monthly loan payment for a while, which is a huge financial advantage.

However, monthly payments are typically higher for a lease than a loan. And while leases last just three years, the typical auto loan duration spans five years. And the older your car gets, the more likely it is to need costly repairs.

The best choice depends on your personal circumstances, preferences, and budget. Analyze both options carefully, considering factors such as your driving habits, desired length of ownership, and financial stability. If you are the type of person who doesn’t want to deal with extensive car repairs and like having a new car every three years, a lease may be the right choice. But many people believe that buying a car is the wiser financial choice.

Bottom Line

Whether you opt for a lease or a loan, you’ll want to be prepared for other financial expenses that come with buying a car. Even if you opt for higher monthly payments and don’t put any money down, you’ll be responsible for taxes, title, and fees, along with a down payment on a new car insurance policy. By carefully considering your budget, evaluating your financial standing, and crafting a personalized savings plan, you can successfully save for a car.

Frequently Asked Questions

Should I save to pay cash for a car instead of getting a loan?

Paying cash for a car means you won’t have to deal with car loan payments or interest rates. However, it might not be the best option for everyone.

If buying the car outright depletes your savings, you might not be prepared for emergencies or other financial goals. Plus, you may have to settle for an older vehicle which could require costly repairs just a few years (or even months) down the road.

On the other hand, taking out a loan increases the total cost of the car due to interest payments and comprehensive car insurance your loan provider may require. You’ll need to ensure the monthly payment plus insurance fits within your budget.

What if I can’t afford to save the recommended 20% down payment?

Many car dealers have zero percent down offers for qualified customers, but that will lead to a higher monthly loan payment. The ideal down payment is the amount you can afford without dipping into emergency savings.

Can I still get an auto loan if I have bad credit?

While having bad credit can make it more challenging to secure a loan, it doesn’t make it impossible. Some lenders specialize in offering loans to people with bad credit. However, be aware that these loans often come with higher interest rates.

Can I negotiate the car price?

Absolutely! Car prices are typically negotiable. Doing your research on the car’s market value can give you an idea of how much room you have to negotiate. Also, remember that dealerships are often more willing to negotiate near the end of the month, quarter, or year, when they’re trying to meet sales goals.

Should I consider a co-signer for my auto loan?

If you have a low credit score or limited credit history, a co-signer with good credit could help you secure a loan with better terms. However, remember that a co-signer is equally responsible for repaying the loan. If you fail to make payments, the co-signer is obligated to do so, which could strain personal relationships.

Dawn Allcot
Meet the author

Dawn Allot is a personal finance writer and content marketing expert specializing in finance, travel, real estate, and technology. In addition to her work at Crediful, Dawn regularly writes for Bankrate, GoBankingRates, and The Balance.