- Saving for a car starts with setting a realistic target, deciding whether to use a car loan, and understanding how borrowing will affect the total cost of your vehicle.
- Creating a budget and savings plan - such as using the 50/30/20 rule and a dedicated savings account - can help you build a deposit and stay on track.
- Buying a new or used car and securing finance involves trade-offs, from depreciation and running costs to loan types, interest rates and eligibility requirements.
Not all Aussies will have the means to buy a new car. Many will need to embark on a savings journey in order to buy a set of wheels, and plenty may also need help from a car loan before they drive off into the sunset.
Here's a simple, step-by-step strategy to help you plan, save, and secure your dream ride.
1. Decide how much you need for a car
Before you begin saving, it's important to set a target - and that target could be a particular make and model of car. That way, you can have a realistic idea of how much you need to set aside and how often.
Setting a solid savings target also means you'll be less likely to find yourself short when it comes time to purchase or with an abundance of money you might have been utilised for other means.
First decision: Car loan or no car loan?
When setting a savings target, it's probably a good idea to also choose whether or not you'll take out a car loan to buy your wheels.
Of course, if you're taking out a car loan, you won't have to save as much cash up front, which means you can get behind the wheel sooner. However, it also means you'll have to repay the borrowed funds, plus interest, over the years to come. This adds to the ultimate cost of the car.
- If you take on a car loan, you'll also need to factor the repayments into your budget, even after you've secured the keys. These repayments can be reduced if you opt for a balloon payment - a lump sum you'll pay to your lender at the end of the car loan term.
There are a few different types of car loans out there. Here are the basic options that are likely available to you, depending on the car you're looking to buy:
Secured car loans
Secured car loans typically advertise lower interest rates. They see an asset (usually the car you’re buying) used as collateral against the loan. If you can’t meet your repayments, the asset may be taken off you to recoup the funds.
Unsecured car loans
Unsecured car loans don’t require you to use the car as security against the loan. Because of this, unsecured loans are riskier for a lender. To compensate for the risk, lenders generally charge higher interest rates.
Considering buying your first car or a new set of wheels? Check out these competitive car loan options available now:
Lender Car Loan Interest Rate Comparison Rate* Monthly Repayment Interest Type Vehicle Type Maximum Vehicle Age Ongoing Fee Upfront Fee Total Repayment Early Repayment Instant Approval Online Application Tags Features Link Compare Promoted Product Disclosure
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Choose whether you want a new or used car
Another decision to make early on is whether you want to buy a brand new car (after all, you can't fake that smell) or if you're happy to purchase a used car (and avoid a whack of depreciation while you're at it).
Why should you buy a new car?
New cars are untouched and should be in perfect working condition. If they're not, they often come with a three, five, seven, or even a 10 year warranty. And you can choose the exact specifications you want, down to the paint colour and rims.
However, they're also typically significantly more expensive than their used counterparts, thanks to depreciation. Some cars can lose a quarter of their value in as little as three years, which might mean losing tens of thousands of your hard-earned dollars, never to be recovered from that asset.
Why should you buy a used car?
Used cars, on the other hand, are usually cheaper, as the majority of the early depreciation has already occurred. The used car market is also much wider, encompassing private sellers and dealerships. This might give you more negotiating power. Not to mention, you can often buy the car soon after you inspect it, even on the same day and, if it's a new enough vehicle, it might still have some residual manufacturer’s warranty.
Though, buying a used car means running the risk of significant wear and tear or mechanical issues. As cars get older, cost of repairs and maintenance can outweigh the value of the vehicle. While it’s important to look for a full service history and receipts, chances are if the car has had more than one owner this may have been lost to the sands of time, or the logbook has gone missing.
Buying a used car also means you might not get the exact combination of colour and features you desire at your price range and it can be harder to get competitive secured finance.
2. Create a budget and savings plan
Once you've decided on the car (or cars) you'd like to buy and assessed how much you'll need to buy it, it's time to set a budget that will help you reach your goal and a timeframe that's achievable. A popular savings method is the 50/30/20 rule.
Under this budget, 50% of your income goes towards needs and necessities like rent, bills, transportation, groceries and so on. 30% goes towards wants, like entertainment, eating out, travel and shopping and 20% goes towards savings. Using this rule should allow you to put aside 20% of your income towards your car deposit.
Saving for a car: An example
Carl Owen wants to save $5,000 for a deposit on a used car. His ideal car is a second hand Ford Focus priced at $10,000. He plans to pay half upfront and take out a car loan for the other half.
He earns $2,000 a fortnight, after tax. Using the 50/30/20 budgeting rule, he will put $200 a week aside for his car deposit.
Using this method, he will be able to save up the $5,000 deposit in less than six months. Once he has the car loan, he will need to factor that into his 'necessities' bucket.
3. Set up competitive savings account
When saving up for a car, you might want to set up a dedicated high-interest savings account. This can help you track your progress and earn interest while you save.
If you choose to open a new savings account, make sure you're aware of any bonus interest criteria. If you choose a savings account with a high bonus rate and a low base rate, make sure you meet your bonus conditions each month lest you miss out on maximum returns.
Here are some high-interest savings account options:
Bank Savings Account Base Interest Rate Max Interest Rate Total Interest Earned Introductory Term Minimum Amount Maximum Amount Linked Account Required Minimum Monthly Deposit Minimum Opening Deposit Account Keeping Fee ATM Access Joint Application Tags Features Link Compare Promoted Product Disclosure
Rate varies on savings amount.
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then 5.40% p.a.
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then 4.00% p.a.
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4. Remain realistic and don't be too hard on yourself
With any savings goal, the most important thing when setting up a time frame is to be realistic. If you work part-time, or inconsistent hours, then you may not be able to set up an auto-transfer into a savings account.
Your circumstances will influence what you can save. The most important thing is to set a goal that you can achieve, and hold yourself accountable. If saving $20 a week is all you can realistically afford, that’s better than nothing. It’s better to set an achievable goal and stick to it than to set yourself an impossible goal and feel deflated when you fall short.
5. Apply for a car loan and buy your vehicle
Applying for a car loan is relatively simple. It starts by comparing your options to find the right car loan for you. Then, simply apply to your desired lender.
Usually, to apply for a car loan you will need the following:
- 100 points of ID
This can include your driver’s license, passport, Medicare card, etc. - Proof of residence
This can include a utility bill, proof of enrollment to vote, etc. - Proof of income
Such as a current bank statement, two or three recent payslips, and proof of employment or two years’ worth of tax returns. - Assets and liabilities
Such as details on any property you may own, other loans you might have, any debts (such as credit cards), etc. - The vehicle's details
You'll likely need to provide the make, model, registration number, and price of the vehicle you want to buy, as well as whether it's new or used.
The process of applying for a car loan
The process usually goes as follows:
- You fill out an application form
- Provide your documents
- If the loan is accepted, you’ll have to sign it
- Your loan will then be funded, either directly to the person you’re buying the car from or in the form of a cheque
Keep in mind that if you’re under the age of 18, you may not qualify for a standard car loan.
Can I get a car loan without a credit score?
A credit score is a number that represents your personal finance history. If you haven't taken out a loan before, it’s possible you don’t have a credit score.
If that's the case, you can probably still get a loan, but you'll need to prove that you’re a safe bet for repaying the loan. You can do this by demonstrating the following:
- A secure job with a regular income
- Your ability to meet the repayments
- That you pay your bills and other expenses on time
- That you're capable of saving money from your income
If you have evidence of all these things, you stand a much better chance of getting your loan approved. If you want to go above and beyond, here are some additional steps you can take to stand out as a borrower:
Have a deposit saved
While it’s not necessary to have a deposit saved to get a car loan, it can give you a better chance of having your loan approved.
Use a guarantor or a co-borrower
A guarantor car loan is a loan that is secured by someone (usually a relative) who can guarantee to make the repayments if for some reason you default. The guarantor needs to have a good credit rating to secure your loan.
You may also be able to find a co-borrower to take out a joint personal loan, where you’re both responsible for repaying the debt.
Consider no credit check car loans
A lender that approves loans without running a credit check automatically assumes you have a bad credit history. Because they can’t check your credit history, they will base their decision to lend you money on an assessment of your financial situation, employment status, your income and liabilities.
But a word to the wise: while you might be able to find some lenders who claim to offer car loans without running a credit check, they will probably hike up their fees and interest rates to compensate for the fact that you’re a risky borrower.
No credit check car loans aren’t widely available in Australia though, and some who claim to offer them may be scams.
Additional costs to consider when saving for a car
Aside from the price tag on a new or used car, you also need to factor in the following costs associated once you purchase the car:
- Stamp duty
- Inspection fees
- Insurance
- License fees
- Roadside assist
- Running costs
