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How to Save and Pay Cash for Your Next Car

According to Bankrate.com, it’s a great time to buy a new car.

“The power is in the hands of the consumer,” Michael Caudill, a spokesman for NADAGuides.com, told the consumer finance website.

However - despite low interest rates and other great financing offers - you may be better off crunching the numbers, saving up, and putting down cash for your next vehicle.

Here are 7 expert tips on how to put aside the money you need to pay your car dealer in cash:

1. Understand the Pitfalls of Car Loans

Even if your dealer or your local bank promises great financing, car loans are almost never worth it.

Long-term loans offered at low interest rates - below 3% - can put you on the fast track to spending more money over a longer period of time. 

In fact, according to NerdWallet.com, “43.5% of new-car buyers in the third quarter of 2015 took out loans of 61 to 72 months.”

Those are pretty shocking numbers when you consider that 72 months is 6 years - and your new car has now significantly depreciated in value.

In layman’s terms, that’s called being “underwater” - and it’s what just about every long-term auto loan will do to your finances.

“Ideally, consumers should go for the shortest length auto loan that they can afford,” Jesse Toprak, CEO of CarHub.com, told NerdWallet. “The shorter the loan length, the quicker the equity buildup in your car.”

This may be possible if you can afford to put a large down payment on a new car - but plenty of Americans just can’t foot the bill.

Because the relative value of your car will go down as you work on paying off your loan, it makes more financial sense to save up money for a good car you can afford - then pay in cash.

2. Pay Off Your Current Loan - Fast

If you’re currently paying off a car loan, find ways to put more money toward your payments, suggests Philip Reed, the senior consumer advice editor for Edmunds.com.

“We are in favor of paying off auto loans early because it can help you cope with sudden life changes and afford you more freedom in the long run,” Reed explained to Fortune.

Once you’ve paid off your loan - or if you currently own your own vehicle - save that same amount each month as you work toward building up your cash down payment.

It may take a few years - but you’ll save plenty of money in the long run, especially in interest and other financing fees.

3. Sock Away a Small Amount

According to Mint.com, car payments are the second-highest expense people have to account for in their monthly budgets - right after rent or mortgage payments.

Once you factor in the cost of insurance, registration, and applicable sales tax, you’re looking at another few thousand dollars on top of your new car’s price tag, too.

Committed to saving up to buy a car in cash? Then you’ll have to account for the savings plan in your budget.

The easiest way to start saving for such a large purchase is to set aside a small amount of money each month. Even as much as a few hundred dollars can add up to bigger savings over time.

Making savvy decisions as you get ready to sell or trade your old car can also help, suggest the editors at Mint.com.

“If you plan on trading in, consider selling the car yourself and using that money toward the cost of the car,” they write. “Selling directly often gets you more than you would with a trade-in.”

Try to look at the big picture when you budget - including using your current car as equity.

4. Reduce Other Transportation Expenses

It’s no secret that car ownership has plenty of additional costs above and beyond the sales price. From maintenance to repairs, you’re talking a few extra hundred dollars a month.

That’s why you should find ways to reduce your transportation expenses - and your wear and tear on your current vehicle.

Maybe you can carpool with coworkers or take the bus. Maybe you want to go big and sell your family’s second car and put the money aside for your future purchase.

If you drive less often, you may even be rewarded by your insurance agency, says Jeanne Salvatore, Chief Engagement Officer of the Insurance Information Institute.

“Some companies will offer you a discount if you drive less than the average number of miles per year,” Salvatore explained to Time.

Whatever you decide, find a small, actionable item you can perform each week - then put the savings toward your new car.

5. Find the Best Deal

If you’re going to pay for your new car in cash, a good deal on the car lot is a must.

This may mean pitting multiple dealers against one another, says Jeff Ostroff, the CEO of CarBuyingTips.com.

Once you reach out to dealers in your area, “ask for their best price,” Ostroff advised Bankrate.com. “Let them know you’re talking to other dealers and plan to give the sale to whoever cuts you the best deal.”

As online markets for cars grow, be sure to do your research and deal-hunting on reputable sites like Carmax.com and Autotrader.com, too.

According to Reed, online car salesmen may even be incentivized to cut you a deal.

“[Most] Internet department salespeople are salaried and get extra bonuses based on volume rather than commissions based on the sales price,” Reed explained to Bankrate.com. “That means they have the incentive to cut you the best price to move cars.”

Guaranteed savings in the bank? Sounds like a good way to cut down on the amount of money - and time - you need to save cash.

6. Buy What You Can Afford

Budgeting for a vehicle purchase is a major commitment. That’s why it’s so important to acknowledge how much you can truly afford to set aside - and how long it’ll take you to save the money.

“Financial experts say your car payment and all other automotive expenses shouldn’t be more than about 20% of your take-home monthly pay,” writes Reed.

If you make $45,000 a year, your take-home pay is probably around $2,600 per month. 20% of $2,600 is only $520 - and that has to account for everything: car payment, gas, and maintenance.

Since you’re budgeting for a cash payment upfront, use these finance guidelines as a way to gauge what kind of car to purchase. Can you afford to put $500 into savings every month? How long will it take you to reach your purchase price goal?

If you need more help figuring out your budget, try this car affordability calculator from Edmunds.com to plan for a car that won’t break the bank.

7. Consider Used Cars

Not only are used cars cheaper, but they also make great financial sense - especially if you’re paying with cash.

And, since more consumers are opting to lease vehicles, used cars are nicer - and newer - than they ever have been before.

“The key factor driving all of the trends in used car sales today is the popularity of leasing, which is bringing younger and higher quality used cars back to the market,” Jessica Caldwell, the Director of Industry Analysis for Edmunds.com, told Time.

“We’re truly in the midst of a Golden Age for CPO and near-new used cars,” Caldwell added.

“And with a record number of lease terminations expected in 2016, for the foreseeable future there certainly will be no shortage of supply to meet the growing demand for used cars.”

More new cars mean a better deal for the buyer - that’s you! - as well as lower maintenance and repair costs over time.

Now that’s a real bargain.

Whether you’re ready to ditch financing to save in the long term, or you just want to stick to a strict monthly budget, saving and paying for your next car in cash can mean lots more money in your bank account.

With a little bit of budgeting and some savvy cuts to your transportation costs, you’ll be cruising down the highway in a new car in no time flat.


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