For most people, a car is a necessity. But on average, a new car cost $47,000 in 2021, according to Kelley Blue Book. For used cars, the average topped $27,000. Obviously, there’s more than just the price of the car to consider. Dealer and registration fees, taxes, insurance premiums, fuel, maintenance, tolls, and parking expenses add to the cost of ownership. Many people don’t realize the financial burden they could be taking on. But if you know how to save for a car, you can plan ahead and get financially prepared for your purchase.
Know What You Can Afford
Many car buyers finance their purchases, but paying monthly installments on loans still requires planning. The cost of a car shouldn’t be more than 20% of your income (include all related costs to owning a vehicle). Loan payments shouldn’t exceed 10% of your take-home pay. It’s therefore important to calculate what you can afford. Using the aforementioned guideline, you could afford a $300 monthly car payment if you take home $3,000 each month after tax.
Examples of the taxes and fees include:
- State Sales Tax: In California, the sales tax on new and used cars is 7.25%.
- Registration Fees: A $65 fee is charged to register your vehicle or renew a registration. You’ll also pay license plate, title, and possibly other fees.
- Documentation/Dealer Fee: Some states charge documentation or dealer fees on top of other costs you pay. These can vary considerably by location.
*Check with the California DMV for additional fees that may apply.
With sales tax and fees, you could have to spend $2,000+ more on top of the sticker price of the car.
Know What You Can Borrow
Once you know what you can afford each month, you can determine how much you can comfortably borrow. The loan amount you can get approved for, and the annual percentage rate (APR), depend on your credit score. The loan term (months you have to pay it off) is a factor too. You can often get a lower APR on a new car loan, but compare what a new or used car would cost to decide how much to save.
You can reduce monthly payments by taking a longer loan term. However, interest payments will be higher over time, and you could end up owing more than the car is worth.
Evaluate Your Budget
In addition to your take-home pay, look at your existing debt. Once you subtract payments for credit cards, student loans, medical bills, etc., then you can determine how much of your income can go toward car payments and expenses. If you have a lot of debt, it can cut your budget considerably.
Set Up Your Budget
Knowing how to save for a car can help establish a budget; to ensure you have the money:
- Cut down on unnecessary spending, separating your “wants” from your “needs”. Perhaps you can spend less on groceries or downgrade your cable television subscription.
- Open a savings account to put away cash for vehicle expenses. This can be an effective way to prepare to meet your long-term goals.
- Consider finding a side job to earn and put away more money to increase what you can afford.
- Sell/trade your current car and put the amount you are paid toward your next vehicle. Start by using an appraisal tool to estimate its value, which helps negotiate with buyers/dealers.
- Decide whether to purchase a new or used car; oftentimes you can get more car for your money with a used vehicle.
Buy a Used Car at Hawthorne Auto Square
We have hundreds of low-mileage, pre-owned vehicles from leading brands on our lot. Service and maintenance are included with our 6-month warranty. Our dealership also offers stress-free financing with approval regardless of your credit status. Get pre-approved by filling out our online form and approved for financing in minutes. For more information, call 866-707-7664 today!