What Kind of Down Payment Do I Need to Finance a Car?
A car is a big purchase regardless of whether it’s new or used. That’s why several financing options exist to help you afford the car you want and need. No matter the finance option, though, it’s likely you’ll need a down payment before you can drive off in your new ride.
But how much do you have to pay and how much should you pay? Sometimes, paying a little more than required for your car loan is the best way to go.
The Importance of a Down Payment
Although some promotions make it possible to pay $0 down on a new or used vehicle, more often than not, you’ll need at least some money down. And, even when an offer gives you the chance to skip a down payment, you might want to consider paying something anyway. Down payments have several benefits for you, including:
The more you pay when you sign for your loan, the less you’ll have to pay in monthly payments because your down payment goes toward the price you owe for your car.
Say you finance a car for $20,000 over 60 months. Depending on your interest rate, you could pay somewhere around $360 a month. Paying your lender 10% of the price, or $2,000, as a down payment could drop your payment by about $40 a month.
Less to Pay Over Time
Another cost-benefit for you is that you’ll also pay less for your car over time, which means less interest you’re paying. The lower the amount you finance, the less you’ll pay in interest over the life of your loan. You might even consider opting for a shorter loan term with a lower interest rate combined with your down payment – you could still end up with a payment that’s within your monthly budget.
When you buy a new car, its value depreciates very fast within the first two years of ownership. Some vehicle values drop as much as 20% or more during this period.
Making a down payment can help offset that depreciation and get your car paid off faster. This is good news if you plan to sell your vehicle after paying it off because you won’t experience as much of a dent in your profits.
How Much Should I Put Down?
Now that you know the why behind a down payment, let’s talk about how much you can expect to, and should, put down on a vehicle.
First, you usually won’t be required to put down a specific amount for your purchase, although some lenders might have specific requirements. You can, instead, choose what you can afford, but remember that a very low down payment can significantly affect your payments and interest rate.
Second, remember that used and new cars are different. Used cars have usually gone through their quickest depreciation period, assuming that they’re two or more years old, so you don’t necessarily need as much of a down payment as you would a new vehicle. Newer cars released within the last year will still depreciate fast, so bumping up your down payment can benefit you in the long run.
For used cars, consider putting down 5% to 10%. For new cars, a 20% down payment is standard. For a $20,000 new car loan, that’s $4,000 down. If you can’t afford that, pay as much as you can reasonably afford to offset depreciation.
Fortunately, you can make this payment by trading in a car with at least that much value or taking advantage of dealership or manufacturer rebates to bring the cost down.
When you finance a vehicle with our dealership, you’ll have a few options to get you into the car you want. We invite you to contact us or stop into our dealership today to learn more about our financing plans, bad credit car loans, and more.