If you’ve decided on putting some money down on your next car, you’re making a great choice! Down payments are a great way to lower the overall cost of financing a vehicle. On top of that, putting money down helps bad credit borrowers improve their chances of being considered for an auto loan.
How Much Should I Save for a Down Payment?
Before you start saving, it's a good idea to set a goal for how much you’d like to save. How much of a down payment you should make can depend on if you’re in the market for a new car or a used one.
Typically, personal finance and car buying experts recommend that borrowers who are looking to buy a new vehicle have 20% ready to put down. Since new cars lose value very quickly in the first few years, that big down payment can help keep you out of negative equity.
If you’re looking to buy a used vehicle, most experts suggest having at least 10% to put down. When you have bad credit, lenders are probably going to ask you to have at least 10% of the car's selling price or $1,000 down to get into an auto loan. You can always put down more than the required amount, too.
Now that you have a rough idea of how much you need, here are five down payment savings tips to get you ready for your next vehicle:
1. Make Your Savings Deposits Automatic
Having cash put away into your savings each month without you even having to do anything is a great way to build it up. You won’t have to remember to deposit the money in your savings if it’s done before you get your check! If you set your deposits to come out automatically before your payment is in your checking, it can be an “out of sight, out of mind” type deal.
Another bonus of automatic deposits? That money saved won’t get eaten up by monthly expenses or extras. If you can, create a new savings account at a different financial institution than you primarily use. If you have electronic access to your accounts, you may be tempted to transfer your savings into your checking for some extra spending. Make that down payment savings account harder to access than your regular checking account – not impossible in case there’s an emergency, just harder.
2. Get a High-Yield Savings Account
Not all savings accounts are created equal, and some have more benefits than others! When you put cash in your savings account, you’re usually paid interest that’s automatically added to your balance.
Most savings accounts have an annual percentage yield of around 0.5% to 1%. If you can find one higher than that, it could boost your savings passively, without you having to do anything. Easy!
3. Pay Down Your Credit Cards
This sounds counterintuitive at first glance since you’re paying off a bill and not putting money toward your savings, but it’s actually a great savings technique. Odds are, if you have a balance on your credit card(s), then you’re being charged some hefty interest on that balance. Pay down your credit cards as much as you can. If you get them completely paid off, then you don’t have to worry about making that minimum monthly payment each month, as well.
Another large bonus of paying down your credit cards – which is a form of revolving credit – is that it improves your credit score. The FICO scoring model looks at your revolving credit, and the rule of thumb is if your credit card balances are more than 30% of their spending limits, then it really starts to lower your credit score.
Paying down your credit cards not only helps you allocate more money toward your savings each month, it also results in a better credit score and improves your chances of getting approved for a car loan in the first place. Win-win-win!
4. Evaluate What You Can Leave Behind
Cutting down expenses can be really difficult, but there may be a few extra splurges that you can let go of.
For example, do you pay for multiple streaming services? Can you afford to leave one behind? Do you still have cable? Are you buying lunch every day at work? Are there ways to lower your phone bill? Even if you’re only saving a few extra bucks each month, that extra cash could be going right toward your savings instead of a splurge.
Also, if you’re the type of person that can’t resist a flash sale, or when you see a coupon and you gotta have that, then consider unsubscribing to retail emails. You could also try deleting your online shopping apps off your phone to curb spending.
5. Consider Trading In Your Car
Keep in mind that you don’t have to have a down payment in cash only – trade-in equity can help meet a down payment requirement.
You can spruce up your trade-in by simply cleaning it, buffing out cosmetic damages, and removing stains from the interior. Don’t put too much money in cleaning it up, though, since a dealer can likely fix any major mechanical issues for cheaper than you can.
Down Payments and Auto Loans
Down payments are great for lowering interest charges, possibly qualifying for lower interest rates, and the biggest plus for many borrowers: lowering your monthly auto loan payment.
Many borrowers focus a lot on what their car payment is going to be, not the actual cost of the auto loan. Don’t be a payment shopper, but if you have a cap on what your monthly car payment needs to be, then play around with our monthly payment calculator. This can help you determine how much you may need to put down to get to the payment you want.
While saving for a down payment and working on your credit score are great steps to getting approved for financing, sometimes the biggest hurdle is finding a lender for your credit. Not every lender can approve every borrower – some have high credit score requirements. There are auto lenders that assist bad credit borrowers, however, and they’re located at special finance dealerships. Here at The Car Connection, we know where they are!
To get matched to a dealer that has the resources you need for your credit, complete our free car loan request form. There’s never a cost or obligation to work with us, so get started now!