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

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

Ready to buy a new car? If you’re done with all your research and find the perfect set of wheels, it’s time to think about the down payment. Most experts will tell you that 20% is the golden figure and it is usually right. If you can afford it, it is wise to make a down payment of 20% on your new car. If you can’t, try to get as close as possible. This will help you get a loan with favorable terms, ensure low monthly payments and also avoid being upside down on the loan.

20% may seem high for many car drivers. You might want to put down a lower figure but we bring you some key reasons why this is a good idea:

  • You can get better loan terms, including a lower interest rate

  • You also have higher chances of getting your loan approved

  • Your monthly payments will also be lower and over the life of the loan, you’ll end up paying less in total interest

  • You will also enjoy more equity in the car, giving you a sense of ownership

  • You won’t owe more than the car’s worth or what you’ll get from the insurance company if it is totaled

  • By paying a higher down payment, your overall debt level will be manageable

Lower Interest Rate

When you opt for a higher down payment, it sends a signal to the lender that you’re committed to the car and belong to the group of low-risk borrowers. This will help you get better interest rates from banks, dealerships or other financial institutions.

Loan Approval

In case your credit score isn’t excellent, opting for a higher down payment can get you qualified for financing. Remember that you don’t always need cash for your down payment. You can also opt for a trade-in or a cash rebate on your new car’s purchase.

Lower Monthly Payments

When you put more money down, it ensures that you have to pay less every month and also, less interest is paid over the life of your loan. If you’re not able to get a low financing deal, you should definitely consider making a bigger down payment or buying the car outright.

More Equity

Mathematically, the more money you put down, the more equity you’ll have in your car. The number 20% for a down payment has been derived because new cars tend to depreciate at about 20.5% in the first year and thus, paying a 20% down payment helps you offset the first year of depreciation for your car.

Avoiding Being Upside Down

If you pay a little down payment, you’ll owe more to the lender than your car’s worth. You might see many dealerships offering the popular zero down payment option. However, they can be risky in the long term. When you get 100% financing on your car, you owe more than the car’s value and this makes you upside down on your loan. If you are in a car accident and your car gets totaled, the insurance money won’t be enough to cover your pending loan.

Generally, it is advised to pay 20% or more for your down payment if you can afford it. This can offer multiple financial advantages throughout the years of your car ownership.