When you are purchasing a new or used car, you will need to determine whether you want to pay a down payment on the vehicle. Most people don’t have the cash to purchase a vehicle outright and rely on auto loans to acquire the car. When you’re taking out an auto loan, lenders may require you to make a down payment. If that’s the case, you will need to determine how much money to put down. Let’s take a look at what you need to know about this process.
What Is a Down Payment?
A down payment is the amount of money you pay upfront when buying a vehicle. Some lenders require down payments while others don’t, but you may want to consider putting money down regardless of the requirements. If you don’t have the cash to put down, trading in your old vehicle is a form of a down payment as well. Your trade-in car’s value will be subtracted from the total loan amount, just like a cash payment.
Benefits of a Down Payment
Putting money down on a vehicle has its benefits. When you fully finance a car, you will be paying the car’s full cost with all of the added interest and typically end up owing more than the vehicle is worth. Putting money down helps to eliminate the financial strain by lowering your monthly payment, reducing interest, and keeping you ahead of the curve when it comes to the vehicle’s value. In the long run, you will be in a better position to trade in or sell the car when you have made a down payment.
Pay Less Interest
A down payment reduces the total loan amount. In turn, this lowers the total interest you will pay over the life of the loan. If you are taking out a three-year loan on a $10,000 car with a 4.5% interest rate, you’ll pay a total of $709 in interest. If you can put down 20% ($2,000), you will only have to pay a total of $567 in interest.
Loan Approval
Suppose you have a low credit score; paying a down payment can help you get approved for the loan you are seeking. Your credit score helps lenders weigh the risk they will be taking when giving you a loan. If you can’t make a down payment, lenders have more to lose if you aren’t able to make your payments, and they will have to repossess the vehicle.
Pay Lower Monthly Payments
Making a down payment can reduce the total loan amount and may lower your monthly payments in the process. Let’s say you purchase a car without a down payment. With a three-year $10,000 loan at a 4.5% interest rate, your monthly payments would be $297 per month or more if you include the sales tax in the loan. When you make a down payment of $2,000 and borrow only $8,000 for the same vehicle with the same interest rate over three years, your monthly payment would drop to $238 per month.
Offset Depreciation
Used cars will lose an estimated 15% of their value per year. New vehicles depreciate faster by losing around 25% of their value per year. When you can afford to make a significant down payment, you can help offset the vehicle’s depreciation and keep yourself from becoming upside down in a loan, where you owe more than what the car is worth. Since used cars lose value at a lower rate each year, they are often a better value than purchasing a new vehicle.
Should You Pay a Down Payment?
When a down payment isn’t a requirement, should you put money down anyway? There’s no simple answer to this question. If you have the money to spare or you’re trading in your old car, the answer is yes. The answer is no when you need a vehicle but don’t have the extra money or an old car with enough value to cover the down payment. If possible, you should always try to put money down upfront to help with interest and your monthly expenses.
How To Calculate a Down Payment
Some lenders will require a down payment regardless of your credit score or the cost of the vehicle. If this is the case, you will need to know the percentage the lender is asking you to put down. The more you can put down, the better, and it never hurts to have an old car to trade-in.
Let’s say you are financing a $10,000 car, and the lender is asking for a 10% down payment; you will need to put down $1,000 upfront. If you are trading in and your vehicle is worth $500, you will need to pay $500 cash. Auto down payment calculators such as the one found at Bankrate.com can help you run different scenarios when determining the ideal down payment for you.
Look Over Your Finances
Purchasing a vehicle is a significant investment regardless of its price. Take the time to look over your finances before you begin shopping for your next car. If you aren’t already using a budget, you may want to implement one before adding a new monthly payment to your existing bills.
A budget will help you allocate your income and give you an idea of the monthly payment you can afford. Organizing your finances into a budget will also help you determine how much you can afford as a down payment. Once you have these figures worked out, you will be ready to find and purchase a car.
Purchasing a car can be intimidating, but being prepared for the process can help alleviate any pressure you feel regarding your budget and down payment. When you know how to calculate down payments and interest rates, you will have a better understanding of the auto loan process as a whole. Do your due diligence and research the value of the car you are interested in, reviews of the lender you are using, and how the purchase will impact your finances.
Contact Rydell Outlet
Have any questions about buying used cars in Grand Forks? We can help. Get in touch with Rydell Outlet to learn more about putting down payments on a car and anything related to used car finance.
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