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Buying a car can be one of the biggest purchases you make. Consider that the average cost of a new car in December 2021 was $47,000. Yes, that’s a big chunk of change! But there are a number of ways you can save money on a car.
Tips for Saving Money on a Car
If you’re getting anxious, worrying about how to save money on a car, go no further. We’ve got this.
Get a Used Car
A used vehicle can be much cheaper than a new one. Yes, you may have figured that one out. But here’s the math. Consider that the average price of a used car was $27,500 in December 2021, or about $20,000 cheaper than buying new. The price of used cars has skyrocketed in recent months due to supply chain issues. Prices at the end of 2021 were a third higher than they were in January. Still, buying a car that’s a few years old may allow you to afford features you wouldn’t otherwise be able to.
Trade in a Used Car
If you have a car that you’re looking to replace, consider trading it in with your dealership for credit toward a new vehicle. Some dealers will even allow you to use your trade-in to cover the down payment. Be aware that you may get more money selling your car on your own. Though that process involves finding buyers and will take more time and effort.
Compare Financing Programs
The sticker price of the car isn’t the only cost you’ll face when you buy a vehicle. Research financing programs through your bank and other lenders. That way you’ll understand who will offer you the best terms and interest rates to save you the most over the life of the loan. In general, the lower your interest rate and the shorter the term, the less you’ll end up paying.
Pay for Your Car with Cash
Consider paying for a car in cash, if you have enough on hand of course. You won’t have a monthly auto payment or owe any interest, which means you ultimately spend less money. Paying in cash may also open the door to discounts or give you some leverage as you negotiate a price with the car dealer. Be sure to weigh this option carefully. If you are able to finance the car at a low interest rate for a short term, depending on your circumstances, it may be worth paying the extra interest costs to keep more money in your bank account for longer.
How to Save Money on a New Car
Sure it’s cheaper to buy a used car. But how to save money on buying a new car?
Negotiate with the Dealer
Before you buy a car, arm yourself with key information. First, know your budget and be willing to stick to it. Next, research pricing and financing in your area. Go to your bank before going to the dealership to find out what loans may be available to you. Check out websites like the Kelly Blue Book or Autotrader for suggested retail prices and for the cost to the dealer, also known as the invoice cost. The range in which you’ll be able to negotiate will likely fall somewhere between invoice cost and the price the dealer is listing. With this information handy, you’ll be in a better position to negotiate prices with a dealership and know when you need to walk away. Once you’ve negotiated a deal that works for you, be sure to read all the fine print before you sign a contract. Make sure the dealer hasn’t thrown in any unnecessary add-ons that you’re not interested in, such as extended warranties.
Get an Energy Efficient Car
Electric vehicles are a little bit pricier than their gas counterparts. On average, you can expect to pay $524 per month for a gas vehicle, compared to $529 per month for hybrid vehicles and $689 for electric cars. That said, over the life of a vehicle, the owner of an energy-efficient vehicle can save quite a bit of money, as much as $6,000 and $10,000. Pair that savings with government tax incentives for some vehicles and owners could save as much as $17,500.
Estimate Maintenance Costs
Maintenance costs vary across make and model of car. So as you are researching vehicles to buy, be sure to take these into account. For example, the estimated five-year maintenance on a 2019 Ford Explorer is about $8,900, while a 2019 Subaru Forester has estimated five-year maintenance costs of nearly $1,500 less. Research these costs using online resources such as Edmunds or Consumer Reports.
Do Not Focus on Brands
It’s easy to get stuck on the idea that you want a certain make and model. But avoid being brand conscious. Instead, focus on — and prioritize — the features that are most important to you and look for vehicles that meet those needs. You may find the cheapest option isn’t the brand you initially thought you’d buy.
How to Save Money on a Car Loan
Don’t take your foot off the gas when researching ways to save money on the loan.
Borrow Less Money Than Needed
The more money you can put down when you purchase a vehicle, the better. More of your own money is on the line, so lenders may offer you better terms and lower interest rates.
Improve Your Credit
Your credit score is one of the first things that a lender will look at when you seek financing for a vehicle. Generally speaking, lenders offer more favorable interest rates and terms to individuals with higher scores. For example, the average new car interest rate for individuals with a super prime credit score (a credit score of 781 to 850) is 2.58%, while a deep subprime credit score (a credit score of 300 to 500) is 12.99%. If you have less than perfect credit, there are steps you can take to improve your situation, including making all payments to creditors on time, catching up on missed payments, paying down credit cards, and limiting the amount you apply for new credit. This should help you save money on a car loan.
Refinance Your Auto Loan
If you’ve already locked in a loan and it becomes unmanageable, or you’re looking to save money to put toward other financial goals, consider refinancing. It’s an excellent way to lower your car payments. When you refinance, you pay off your old loan with one from a new lender, hopefully with better terms and lower interest rates. The time to refinance may be right if you improve your credit score or if interest rates drop. As you consider this option, get to know the advantages and disadvantages of auto loan refinancing. On the plus side: You may be able to reduce your interest rates or monthly payments, you may get more manageable terms, and you may free up cash. It may be tough to find a lender willing to offer you a loan, you may grapple with prepayment penalties, and your credit score may go down temporarily. Consider, too, the cost to refinance a car, which can include early termination fees, transaction fees, registration, and title transfer fees.
Lease Your Car
If you’re someone who always likes to have a new car, leasing can be a more affordable option than buying. That said, purchasing a used car may be much cheaper than either option.
How Do I Finance a Car?
When it comes to securing a car loan, you typically have a couple of options. Direct lending refers to loans that come from a bank, credit union, or other finance company. The lender loans you money, which you agree to pay back with interest. Dealership financing refers to a loan contract you enter into with your auto dealer. You agree to pay them the amount they finance plus interest over a period of time. Dealerships usually sell these contracts to banks and finance companies that then service the account.Compare financing offers across lenders to find the best deal.
The Takeaway
The sticker price on a vehicle does not necessarily represent the amount you’ll end up paying to drive that car home. Through careful research and due diligence, you can not only knock money off the sticker price but also ensure you don’t overpay for maintenance or financing.What’s more, you can always be on the look-out to save in the future by exploring opportunities to refinance. To learn more about available options to refinance an auto loan, visit Lantern by SoFi.
Frequently Asked Questions
How can you save money on a car purchase?
How can you save on a car loan?
How do I finance a car?
Photo credit: iStock/Ridofranz
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About the Author
Austin Kilham
Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
