Buying a car is a major and expensive purchase. By saving money toward a down payment, you can reduce your monthly payments. If you save enough money to buy the car in full with cash, you eliminate the need for a loan, saving on interest charges associated with borrowing the funds to finance the car.

Saving for a car may seem daunting, but it is certainly possible with some discipline. Here are some steps on how you can successfully save toward some or all of a car purchase.

Decide How You'll Pay for The Car

When it comes to a car purchase, you have several options. Here's a rundown of three ways to pay.

Finance A Car Purchase

According to the National Automobile Dealers Association (NADA), over 80% of new vehicle purchases are financed[1]. 

When financing a car purchase, you can apply to borrow money from a financial institution like a bank, credit union, online lending company, or even a car dealership. Regardless of where you borrow, a financed vehicle purchase typically begins with a down payment followed by monthly payments until the loan is paid off. Once you make your final payment, you fully own the vehicle. But if you fail to make loan payments, your car could be repossessed.

Remember that, because lenders charge interest on auto loans, financing a vehicle purchase is almost always more expensive than buying a car outright.

If you decide to finance your car, you must first determine how much of a downpayment you can make. Typical down payments on vehicles range from 10% to 20% of the car's purchase price. With the help of an online vehicle loan down payment calculator, you can determine how different down payments can affect your monthly loan payments.

It’s also important to secure a loan at an interest rate you can afford. Interest rates can vary widely based on several factors, including your credit history and score, the amount of your down payment, the amount you are financing, the length of the loan term, and the value of any vehicle you wish to trade in. 

It's definitely worth shopping around for auto loans with favorable rates. Although the car dealership may offer its own financing services, dealership loans aren't necessarily the best deals. Be sure to check what auto loans your bank offers.

Lease A Car

Another option is to lease your new car. Leases can be obtained from dealerships, automakers, and some financial institutions.

As with financing your vehicle purchase, a lease requires a down payment, followed by monthly payments which is usually for a term lasting from two to four years. Many buyers see leases as an attractive option because monthly payments for leases tend to be lower than those for auto loans.  

However, there's a big difference. When you lease a car, you may not necessarily eventually own the vehicle outright. At the end of most lease terms you return the vehicle, although some lease agreements may offer a purchase option.

It's also normal for leases to limit how many miles you can drive the vehicle per year. Going over the specified mileage limit, as well as any wear and tear to the vehicle, usually result in extra fees to be paid at the end of the lease term[2]. 

Buy A Car With Cash

As an alternative, you can choose to purchase a vehicle outright with cash. By this, we don’t mean walking into a dealership with a briefcase stuffed with money. Instead, paying for a car with cash means using a personal check, cashier's check, or a wire transfer.

When you buy a vehicle with cash, you save on interest payments. In addition, there are no monthly loan or lease payments--and no danger of your vehicle being repossessed for failing to make payments. 

However, a cash purchase means saving for the entire purchase price of the vehicle. That could take longer than saving for a down payment. 

Want to see how much you could save by paying with cash? Use PNC's Vehicle Finance Calculator.

What’s Your Budget?

If you decide to take advantage of an auto loan or lease, then determine what you can afford to spend in monthly payments and how big of a down payment you’ll need. Create or revisit your household budget, reviewing several months' worth of bank statements. Then compare the money you earn against your spending. 

Upon knowing how much money you typically have remaining at the end of each month, apply that knowledge to learning what you can afford in monthly loan or lease payments.

At the same time, be sure to include any additional costs of operating a car. These will vary based on the vehicle you choose, where you live, your driving needs and record, etc. Factor in gasoline, insurance premiums, potential repairs, and routine maintenance costs. Also, consider added other fees and other charges associated with a car purchase. These will typically be added to your purchase price.

Set A Monthly Savings Goal

Upon determining how much money you need for a down payment or full purchase, begin saving by setting a monthly goal. Divide your goal by the number of months you intend to save.

Say you want to buy a vehicle that will cost roughly $40,000 after taxes and fees, and want to save for a 20% down payment, getting a monthly payment amount that agrees with your budget. That means you’ll need to save $8,000. If you wish to have the down payment in four months, that means you’ll need to save $2,000 a month for four months to reach that goal. 

Remember that the more money you contribute to a down payment, the lower your monthly payments will be--and the less you'll pay in interest overall.

Create A Dedicated Savings Account

One efficient way to save money toward a particular goal is by creating a savings account set aside for that purpose. That way, you don’t spend your vehicle purchase funds on everyday expenses or impulsive purchases. Not only will a savings account earn you regular interest payments, but your account will be protected up to $250,000 by the Federal Deposit Insurance Corp. (FDIC)[3].

Many banks offer ways to automate your savings. For example, PNC's Auto Savings tool allows regular transfers from customer checking accounts to a linked savings or money market account. ("Auto" here refers to "automated," rather than "automobile" — although this can be an effective tool to save for a car purchase). By making the savings contribution automatic, you don’t forget to contribute to your savings. Automated savings also removes the temptation to intentionally "skip" your monthly saving routine.

Ways To Save Extra Money

Here are some tips for saving even more money toward your car purchase goal.

Opt For A High-Yield Savings Account

Consider opening a high-yield savings account or a money market account, offering higher interest rates than standard savings accounts. However, fully understand your account’s policies. Some high-yield accounts may require a minimum balance or incur monthly fees.

Reduce Non-Essential Spending

It pays to be frugal. Check your budget — or create one if you don't already have a budget in place — to learn what you spend on non-essentials. For example, cook at home rather than eat out for a few months. You may also be able to find cheaper ways to purchase your "essentials”, such as by buying generic groceries at a discount supermarket.

Start A Side Hustle

A part-time or freelance job can help you save toward your goal even faster. There are plenty of opportunities for picking up extra work, from traditional side-hustle gigs such as babysitting or dog walking to using a freelancer platform to find graphic design or writing jobs. If you enjoy your side hustle or hobby, consider turning them into an extra stream of income.

The Bottom Line

You can save on interest and other finance charges by putting away money toward a down payment or even purchasing a car outright. Although saving for such a large purchase can feel intimidating, it's not impossible. With a little planning and discipline, you may very well be able to save the money you need.