Purchasing a car can be an exciting event. The thrill of shopping and test driving cars can make the entire car buying process enjoyable, at least until the subject of financing comes up. Eventually, buyers will need to address the topic of down payments. The size of your down payment on a car and whether to make one can be a difficult decision as you weigh it against your current financial situation.
Down payments on a car can be in the form of cash or trade-ins. Those who may have limited funds available, no trade-in vehicle, or have a low valued one may struggle with their initial investment in a car. In general, financial experts recommend a car down payment of at least 20% of the loan amount for a new car or at least 10% for a used car. However, a 2019 analysis conducted by Edmunds found that, on average, car buyers are putting down only 12% of the car loan total.
As you consider the amount of your down payment, it is helpful to understand how it will affect the other aspects of your loan. Generally speaking, the size of your down payment will affect your monthly payment amount, the interest rate you will be charged, and the repayment terms of your car loan.
First, remember you can make a down payment using cash, by trading in a vehicle, or using a combination of the two. If you are replacing or upgrading your car, begin the process by getting an estimate from the dealership where you plan to purchase your next vehicle. This trade-in value will help you decide how much additional cash you may need to make a down payment on a car.
When considering the size of your down payment or whether you should put down money at all, equip yourself with as much information as possible. The following points should help you make a final decision on your down payment.
As soon as you drive your car off the dealer lot, it begins to lose its value. Auto experts estimate the value of a new vehicle drops 20%-25% in the first year of ownership. That’s why they recommend that a down payment on a car equals at least 20% of the total car loan amount.
A reasonably sized down payment helps prevent borrowers from going upside down on a car loan. Going upside down on a car loan means the amount you owe on the loan is greater than the car’s value at that time.
Purchasing a used car presents a different scenario. In most cases, a used car has already gone through much of the initial depreciation a new vehicle would face. Therefore, an estimated 10% down payment may be sufficient to keep you on pace to pay off a car loan.
Car buyers with lower credit scores may find it challenging to get approved for a car loan. Lenders consider loans to borrowers with low credit scores to be risky investments as they may be more likely to miss some payments or not pay at all.
If you find yourself in this group of borrowers, don’t lose hope. A larger down payment on a car can help you get approved for a car loan as it decreases the total loan amount. A smaller loan reduces the lender’s risk.
Consider interest as the cost of borrowing money. It adds to the total cost of your car.
Putting down a larger down payment can not only increase your chances of loan approval but doing so may also help you get a loan with a lower interest rate. As mentioned, the greater your down payment, the smaller the loan amount and the lender’s risk. Because you reduce the risk for them, lenders may reward you with a lower interest rate.
Logically, the greater your down payment, the less you will have to borrow. As a result, your monthly payments may be smaller. Financial institutions estimate increasing your downpayment on a car by $1,000 will decrease your monthly payment by $20. This estimate is only used as a guide and is based on a loan with a 5% APR.
If you have the financial flexibility, you may consider increasing your monthly payments to decrease your loan’s term length. A shorter loan term length will lower your car’s total cost as less interest will accrue on your loan.
At Easton Motors, we want to help you make the right choices when it comes to financing your used vehicle purchase. We understand the “right choices” will be different for each car buyer, so we will work with your specific circumstances.
Our finance specialists will work with you to examine different financing scenarios and answer all of your questions. Please visit our website to learn more about us and contact us to set up an appointment.
