Saving for a bigger deposit can cut the cost of your next car by hundreds of pounds.
- Why save?
- Step 1 – Weigh up your options
- Step 2 – Work out how much to save each month
- Step 3 – Get started
- Step 4 – Watch your savings grow
- What to do next
- Your top tips for buying and running a car
Why save?
Saving up a deposit can knock hundreds off the cost of your car.
For example, borrowing £7,000 for a car could mean repayments of £265 a month, bringing the total price to £9,500.
By saving up a £2,000 deposit, you borrow less, cutting the repayments to £190 a month, and the total cost to £8,800 - a saving of £700.
Step 1 – Weigh up your options
There are lots of ways to pay for a car:
- Take out the dealer’s own finance
- Get a loan from a bank or building society
- Opt for a personal credit plan or hire purchase
- Or even choosing to lease a car instead of buying.
But, whatever option you choose, putting down a bigger deposit can slash the cost of your car.
Some deals, such as 0% finance, are only available if you have a large deposit.
What you pay back when you borrow £1,000
If you could borrow at an interest rate of 7% a year, for each £1,000 you borrow over three years, you’d have to pay back £1,108.
So saving up an extra £1,000 towards the deposit would knock £108 off the cost of the car.
If you had to pay a much higher interest rate of 19% a year, each £1,000 you can put down as a deposit would save you £292 if you borrowed for three years and £508 if you borrowed for five years.
How much you personally save on the cost of your next car depends on the interest you’re charged.
The higher the rate, the bigger your payback from saving for a deposit.
Step 2 – Work out how much to save each month
If you’re still making monthly repayments on your current car you might be thinking how can I afford to save as well?
But starting to save even a small amount now means you’ll be able to borrow a bit less next time, which will cut the repayments on your next car.
Then you’ll be able to afford to save a bit more, and so on. Before you know it, you could be a cash buyer with no repayments at all!
How much deposit you aim for depends on the car you want to buy.
But be realistic – if you set your savings target too high, there’s a danger you’ll give up.
It’s best to set your target at an amount you feel comfortable saving each month and you can always top this up whenever you can afford a bit more.
If you decide on £50 a month, use our Savings calculator to explore how long it will take you to build up the deposit you want.
Step 3 – Get started
Top tip
Set up a regular payment (direct debit or standing order) to automatically transfer a set amount into your savings each month.
You’ll want to earmark these savings especially for your car.
Maybe you already have an online bank account letting you set up separate pots for different goals.
Otherwise, open a separate savings account.
You could opt for an instant access account.
But, if you’re looking to buy in a year or two’s time, you could also look at accounts tying up your money but offer better interest – see our guides:
Price comparison websites
Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.
We recommend the following websites for comparing savings accounts:
Remember:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
- Find out more in our guide to comparison sites.
Step 4 – Watch your savings grow
Check your progress regularly.
Remember, every £100 in your account could be £10, £20, £50 or more off the total cost of your next car.
Review your savings account at least once a year to check you’re getting the best rate of interest.
Make sure you use your yearly cash ISA allowance so you don’t pay tax unnecessarily.
Many ISAs tempt you with a bonus for the first few months or year but then fall back to dismal rates.
What to do next
- Open a savings account if you don’t already have one – go online or pop into your bank or building society.
- Set up a regular payment into your savings account every month. Use this downloadable template (DOC 26KB) to send a standing order instruction to your bank.
Your top tips for buying and running a car
This article is provided by the Money Advice Service.
