If you’re planning to buy a car, saving up for it is more important than ever. The average new car price was $48,528 in May, according to Kelley Blue Book. Used cars aren’t cheap, either, selling for an average of $27,256.
You can get an auto loan to help cover the cost, but interest rates are on the high side. The average auto loan interest rate ranges from about 6.9% to 17%, depending on your credit score. So, it makes sense to put down as much of a down payment as possible to avoid taking on too much costly debt.
But what’s the best place to keep your car savings? This isn’t money you should invest, because the market can go up and down. You don’t want your car savings to be worth less when you need it. Fortunately, there’s one type of financial account that’s ideal for your car fund.
A high-yield savings account is a good option
For security and flexibility, high-yield savings accounts are the best choice. These are like any other savings account, with one important difference — they pay much higher interest rates. The average interest rate for a savings account is currently 0.42%. Many high-yield accounts are offering upwards of 4%.
To put that difference into perspective, if your savings account pays 0.42%, a $10,000 balance would earn you about $42 in annual interest. With a high-yield account that earns 4%, that same balance would earn you about $400. From a personal finance standpoint, it’s an easy call.
You can withdraw your money from a high-yield savings account at any time. That makes it perfect if you’re not exactly sure when you’re going to buy a car. You could take out your money after one week, one month, or one year. It’s all up to you.
If you’re wondering how secure these accounts are, most are FDIC-insured just like accounts from the big banks. That covers up to $250,000 per eligible account in the event of a bank failure. You can confirm that an account offers FDIC insurance on the bank’s website, by contacting the bank, or by contacting the FDIC.
You could also get a money market account or a certificate of deposit
There are a couple of potential alternatives to consider, if you’re not sure a savings account is right for you.
Money market accounts have the benefits of both savings and checking accounts. Many of the top money market accounts have similar interest rates to high-yield savings accounts. In addition, they also let you use your money with a debit card, checks, or both, like you can with checking accounts.
This makes it easier to access your money. With a savings account, you’d normally need to transfer your money to a checking account first. With a money market account, you could write a check directly from that account when buying a car.
If you want to lock in your interest rate, you can do that with a certificate of deposit (CD). Savings accounts and money market accounts have variable interest rates that can go up and down. They’ve gone up quite a bit over the last year and change, but there’s no telling how long they’ll stay that way.
CDs are accounts you open for a fixed time period and with a fixed interest rate. Terms generally range from six months to five years. And the best CD rates are sometimes higher than the highest savings account rates, so you could lock in a fantastic rate this way.
However, you can’t deposit more money into a CD after setting it up. You’d need to open a new CD, meaning this may not be a convenient option if you plan to consistently add to your car savings. But it can work well if you have a large chunk of money saved already and want to ensure that it earns a high interest rate.
Building your car savings
To sum it up, a high-yield savings account is a great place to save for a car. If you want more withdrawal options, money market accounts are worth considering. And CDs work well for getting a fixed interest rate on your savings.
If you’re going to need an auto loan, also take this time to work on improving your credit score. That can help you get the lowest interest rate on your loan. Once you’re ready to buy, make sure to compare auto loan options, as you could find that some lenders offer much better deals than others. Cars may be expensive, but a large down payment and a reasonably priced auto loan still make a big difference.
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