What Kind of Down Payment Do I Need to Finance a Car?

What Kind of Down Payment Do I Need to Finance a Car?

The right down payment on your car can significantly impact your financing during a purchase. Therefore, it is important to consider how much you can pay upfront. Simply put, the less money you borrow, the smaller your monthly payments and finance costs. However, there are many other considerations involved in auto financing.

The Golden Number – 20%

Most finance experts will tell you that you should put down at least 20% of your car’s price. This figure has been derived mostly because a car’s value tends to depreciate by 20% within its first year. When you pay one-fifth of your car’s price, you can avoid being upside down on your loan, which means that you won’t owe your lender more than your car’s worth. If you want to buy a new car and don’t have 20% of your car’s price in cash, don’t worry. Most buyers tend to pay around 10% for their new or used car as they can’t really afford to pay a higher figure. For a used car, a 10% down payment is considered reasonably good as the prices are lower and depreciation is slower.

Effects of a Down Payment on Financing

You can use an auto loan calculator to see how different down payments affect your financing. For instance, you can try choosing different amounts and see how much money you’ll end up spending over the course of your loan. Your credit score also plays a vital role in your financing. If you have a good score, you can get a loan with great terms. On the contrary, buyers with a fair or average score might have to adjust to non-favorable terms. In such cases, the best way to avoid spending too much money in interest is to put down the maximum amount of cash. You can also opt for a trade-in or a cash rebate to help you with the down payment.

Advantages of a Down Payment

  • It lowers the amount of money you borrow and thus, also reduces your financing costs.

  • By increasing the down payment, you have an opportunity to enjoy lower interest rates from your lender.

  • You have an opportunity to offset your vehicle depreciation and by avoiding being upside down on your loan, you can save a lot of money in case of an accident.

  • If you’re a first-time car buyer, you can strengthen your application and increase your chances of getting approved for a loan by choosing a higher down payment.

What About Zero Down Payment?

Many car buyers often find the popular zero down payment option in car dealerships. While this is a highly tempting offer, remember that it can cost you a lot more money in the long run. Your monthly payments will also be higher and in many cases, buyers don’t even qualify for this due to their credit score. You might also have to take a loan for a longer duration and your payments might continue even when your car needs expensive repairs, causing a dent in your budget.

The best way to determine the right down payment for you is to analyze your financial situation and pay as much as you can afford.