2022 is a record year for both new and used car prices—and not in a good way. Used cars are at just over $33,000 on average as of July. The average new car price in 2022 is a little harder to pin down because prices vary widely depending on make and model.
Due to these astonishing prices, you need to carefully consider how much you should save for a car down payment. Buying a car can be stressful, so saving for a car should be a priority if you want to be well-prepared and selective in your next car purchase.
Not many people have the money to buy a car in cash, so obtaining a car loan is often a necessary evil, especially for people with low credit.
Different lenders have different requirements and recommendations, so let’s learn the truth about how much to save for down payments.
How Much Should I Try to Save for My Car Down Payment?
It depends on which lender is supplementing your purchase, the price of the vehicle, and whether you have anything to trade in. Here’s why.
Some lenders require a certain amount up front in order to service your loan. However, if you are looking for a car loan for low credit individuals, this isn’t often the case. Instead, they increase the amount of interest that they charge so that they are more likely to profit from lending the money.
The Price of the Vehicle
Regardless of the circumstances, the more money that can be put toward a down payment, the better. Doing so will lower the overall cost and hence lower the amount of the car loan needed to purchase the vehicle, especially if you are hoping to buy a new or higher-priced used car.
Is a Trade-In Involved?
Suppose you are trading in an older vehicle. In that case, that will often satisfy the need for a down payment altogether, depending upon the lender’s requirements and the dealership at which you are purchasing the new or used vehicle. When you are saving for a car, however, you should not take this into account.
It would be best if you didn’t count on this because the dealer may not see much value in your trade-in, and it may not be enough to satisfy the down payment or the lender’s requirements.
The Truth Behind the 20% Rule
Many financial advisers and talking heads will tell you that the ideal number to get to when considering how much to save for a car is 20%. As mentioned above, the more you can put down on a car initially, the better. While 20% is an ideal number to strive for, it can be quite challenging if you are young, have less-than-great credit, or are low-income.
20% is not an arbitrary number, either. If you can drum up 20% for a car down payment, many lenders will give you a significantly better interest rate.
20% will also help protect you a bit from depreciation. As the old saying goes, “your car starts losing value as soon as you drive it off the lot,” and that’s not necessarily wrong.
By plunking down 20%, it gives you a significant head start in the race against depreciation. This is important because it means that, theoretically, by the time you pay off the car, it will still have some value that you can then use to your advantage by trading it in or selling it at a higher price and using the profit to roll it into your next new set of wheels.
Is 10% Acceptable?
10% is better than nothing. It will do the trick for most lenders and dealerships, especially if you also have a trade-in and you are getting a loan.
As mentioned above, any amount you can put down before beginning your payments is beneficial because it lowers your payments. 10% won’t necessarily fetch you a much lower interest rate, unfortunately, but it’s a start.
Tips on Saving for a Car
There are several frugal steps that you can take to begin or continue your journey toward buying a car, even if you have bad credit. Here are some quick bits of advice to help get you on your way to making your car down payment.
Set a Goal
Let’s say that you’ve got your eye on a $20,000 used vehicle, and you are dead set on abiding by the 20% Rule. 20% of $20,000 is $4,000 – of course, $20,000 is before taxes and BMV fees, so your goal should be closer to $4,500.
Make a Budget
Working from the above goal of $4,500, let’s say you want to hit that goal in two months. Two months equals roughly eight weeks. That means that you’ll need to squirrel away about $560 per week for eight weeks to make it to your goal on time.
Cut Spending While Earning More
This might seem pretty straightforward, but it’s a proven model. To make it to your goal on time, you have to cut your typical spending and earn more during your savings period for your car down payment. For example, let’s say you forego spending $250 on fast food and entertainment per week.
That will still leave you with a gap of $310 that you’ll have to earn extra that week. A good thought would be to use the time spent on entertainment to work extra hours at your job. Investing time and shifting it to meet your needs is as important as saving money.
Get to Work Saving Money for Your Down Payment
Whether you are in the market for a new luxury SUV or just your first car, you should make every attempt to save at least 10%-20%. Using some of the tips outlined above, you should be off and rolling, even if you have low or bad credit.
Now get out there and start making and saving money so you can make your car down payment!
If you found this article helpful, please check out our other blogs on personal finance, health, style, and a number of other topics. After that, get out there and start making and saving money so you can make your car down payment!