How to save for a car

For many Canadians, buying a car is a major milestone. Whether you're tired of taking public transit, using ride-share apps, or borrowing a vehicle from someone else, the sense of independence that comes with your own vehicle is freeing, but it's also a major financial commitment. With the average price of a new car in Canada exceeding $45,000 in 2024, saving for one requires strategic financial planning. So, how do you make your dream of car ownership a reality?

In this guide, we're going to be taking you through all of our best money-saving tips and tricks, so you have a better understanding of what costs you'll need to factor in, how credit scores work, and other information you'll need to make a smart financial decision. Whether you're buying your first car or upgrading to a newer model, this is your roadmap to hitting those savings goals.

Understanding your car ownership needs

Before finalizing your savings plan and opening a savings account, you first need to ask yourself: What kind of car do I actually need? Choosing the right vehicle means knowing what your lifestyle requires. Start by asking yourself questions like:

• Do you need your new car for daily commutes? Occasional errands? Or road trips?

• What type of driving conditions will you be driving in? Do you live in an area of Canada that's relatively mild all year round? Or do you live in a province with harsh winter conditions?

• Do you want a new or used car?

• What kind of features matter most to you? Do you want to save on gas? Are you looking for a new, environmentally friendly car? Or is it sleek and modern?

For example, if you live in a downtown, urban area and will only be using your new vehicle to run errands throughout the week, a compact, used car may work for your needs. On the other hand, if you live in a rural part of Alberta, an AWD pickup truck or SUV may make more sense.

Similar to how you'll need to determine whether you want a new or used car, you'll also want to consider whether you want to buy an electric or gas-powered vehicle. In 2024, zero-emission cars accounted for 13.8% of all new car sales in Canada. However, EV repair costs are expensive, with the average EV repair cost being $6,795 in 2023. Therefore, you need to consider the benefits and drawbacks of all vehicle models.

Set your budget

Once you have a relatively good idea about what type of car will best fit your lifestyle, you'll need to determine how much you can realistically spend on a vehicle purchase. Key expenses you'll need to consider include:

Down payment

As a rule of thumb, you'll want to make a down payment on your vehicle that is between 10% and 20% of the vehicle purchase price. A larger down payment can lower your monthly payments, but it will require that you save more money beforehand.

Monthly car payment

If you're taking out a car loan for your new car, your monthly payments will depend on your specific loan term and the interest rate you're given. Having a higher credit score in this case can work in your favour, as it shows lenders you can responsibly borrow and pay back borrowed money. You can use a loan calculator to determine what terms and interest rates fit into your monthly budget.

Insurance premiums

Canada saw a 9.6% year-over-year increase in auto insurance premiums in 2024. To find the best insurance rates, shop around with different providers, ask about discounts, and consider working with a broker to save as much money on insurance as possible.

Ongoing fuel and maintenance costs

If you're buying a gas-powered vehicle or a hybrid, you'll need to factor in how much you'll spend on average for fuel. Don't forget about other fixed expenses like oil changes, new tires, windshield wipers, and other routine maintenance your vehicle will need.

Apply the 50/30/20 Rule

A good starting point when finalizing your monthly budget is to use the 40/20/10 rule. This rule is a simple budgeting technique that divides an individual's monthly income after tax into three categories:

• Needs (50%): The needs portion of an individual's monthly income goes to essential expenses like housing, utilities, groceries, transportation, insurance, and more.

• Wants (30%): Wants are categorized by non-essential expenses like entertainment, going out to eat, hobbies, travel, and shopping.

• Savings and Debt Repayments (20%): The last category and portion of an individual's income is meant to go to things like an emergency fund, retirement savings, any investments you might have, and paying down debt.

For some context, let's say you bring home $4,000 each month after taxes. 20% of your income comes out to $800 a month, which needs to go toward your savings and debt repayments like student loans, RRSPs, and other monthly expenses for debts.

Open a dedicated savings account

Opening a separate savings account specifically for your car budget is a great way to stay on track with your savings goal. To maximize your car savings fund, consider opening a high-interest savings account (HISA) or a Tax-Free Savings Account (TFSA). Both accounts offer competitive rates and will help you grow your money tax-free. You can also set up automatic transfers from your checking account to your savings account each month, like each time you get paid, so you don't forget to contribute to your monthly savings. Some online banks like Tangerine and Wealthsimple offer accounts with no fees and automated savings features that can help you streamline your financial goals. But, if you prefer, you can also open a savings account with your current bank or credit union. Important points to keep in view:

Cut unnecessary expenses to save more money in your car savings fund

Most times, reaching your financial goals means cutting out extra costs from your current monthly spending. Ask yourself: What can I live without temporarily? For example:

• Cancelling or pausing some of your streaming subscriptions.

• Limiting impulse purchases.

• Reducing how many times a week you eat out by meal prepping.

• Selling items or clothing you no longer need online.

Remember, even saving $5 a day adds up to $150 a month or $1,800 a year!

Build your credit score

As we touched on, if you're planning on taking out a loan for your car purchase, having a high credit score can help you secure a lower interest rate. In Canada, credit scores range between 300 and 900. While the average credit score among Canadians is 660, anything above 720 is considered "good" to lenders. To improve your credit score and save money on interest charges when taking out your car loan:

• Pay your bills on time by setting up automatic payments or calendar alerts on your phone.

• Keep your credit utilization ratio below 30%.

• Check your credit report regularly via Borrowell or Equifax Canada to see your standing.

In 2023, 57% of new car loans in Canada had terms of 84 months or longer, resulting in increased long-term interest rates. An excellent credit rating may allow you to qualify for a shorter-term loan with a cheaper interest rate. Remember that pre-approval for a car loan does not guarantee approval, but it does give you more credibility while shopping for one.

How to compare financing options for your next car

In Canada, there are three ways you can finance a vehicle:

Cash purchase

Paying for your new or used vehicle in one go means no monthly car payments and no interest on those payments, which could save you thousands of dollars when everything is said and done. However, saving up the full amount for a vehicle may not be realistic for a lot of Canadians.

Finance your car through a bank, credit union, or dealership

Most Canadians choose the auto loan route when purchasing a car. You can borrow from a bank, credit union, or directly from the dealership. Loan interest rates vary based on your credit score and down payment amount. In 2024, rates fell, with the Bank of Canada lowering its key interest rate to 3.25%, making loans slightly more affordable. However, it's always a good idea to shop around for different rates and loan terms. If you're buying a new car from a dealership, make sure you know when the best time to buy a new car is, so you get the best rate!

Leasing a car

Leasing allows you to drive a new car for several years while making cheaper monthly payments than financing. However, you do not own the car, so there are kilometre restrictions, and you may be penalized for general wear and tear. At the end of the lease, you can either return the car or purchase it from the dealership, usually at a high cost.

Set a realistic timeline when saving money

Once you've determined how much money you need to save, the next step is to decide what kind of timeline you need to reach your savings goal. Start by calculating your total savings target. This target should include what you want to use as your down payment, title fees, registration fees, and provincial sales tax. For example, let's say you want to save $6,0000.

With this $6,000, you'll then want to divide it by the number of months you can reasonably save this amount. Saving $6,000 in 12 months means putting aside $500 a month. If that’s too much, extend your timeline to 24 months to pay only $250 a month. To make things easier for you, you can also use savings calculators from Canadian banks like TD or RBC to help plan your goal amount. To improve your odds of saving money, you can:

Find an Extra Source of Income

Car shopping is expensive. To make costs more manageable, you may want to consider finding another source of income, such as:

• Freelancing on platforms like Upwork or Fiverr.

• Delivery driving for SkipTheDishes, Uber Eats, or DoorDash.

• Pet sitting with Rover Canada.

• Tutoring English or other subjects.

• Serving or bartending at a restaurant or being a barista at a café on the weekends.

Even saving an additional $300 a month can help speed up your savings timeline.

Keep track of your car savings progress

Tracking your savings progress can help keep you motivated and accountable. Consider using popular budgeting apps like YNAB (You Need a Budget), Mint, or Spendee. These online tools link directly to your bank account and automatically track your income, expenses, and savings.

You can also track how you save money using an Excel sheet of a printable car savings tracker, which you can cross off each month when you make your payment into your savings account.

Car buying checklist & next steps

Ready to start saving money for your first car? Use this checklist to simplify your savings goals:

• Define car needs (size, fuel type, manual or automatic transmission, new and used vehicles).

• Set a budget and your savings goal.

• Open a high-interest savings account or a tax-free savings account.

• Cut discretionary spending and track your expenses.

• Improve your credit score.

• Explore your financing options.

• Choose a timeline and a monthly savings target.

• Look for ways to make extra income.

• Use apps to track your car fund progress.

• Shop around for quotes for car insurance.

How BrokerLink can help

A significant portion of your ongoing car expenses is insurance. But that doesn't mean there aren't ways you can save money on coverage without sacrificing your protection. Whether you're getting your first car insurance policy, have questions about what documents you need for coverage, or whether you need insurance before or after you buy your car, our experienced brokers are here to help! Common policies our brokers can help you purchase include:

• Liability car insurance

• Accident benefits coverage

• Uninsured motorist coverage

• Comprehensive car coverage

• Collision car coverage

• Accident forgiveness

• Car warranty insurance

• Multi-car insurance policy

Contact BrokerLink over the phone or use our online quote tool for a free, competitive quote today!

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