4 benefits of making a down payment on your car
A deposit includes the cash you have on hand, the value of your trade-in, and any discounts you qualify for. All of these elements work together to reduce the amount you need to borrow. They show lenders that you’re serious, which can help you get a better interest rate.
In general, a 10-20% down payment is preferable. But if you can afford to put in more, it can save you hundreds of dollars in interest.
4 advantages of putting down a down payment
Down payments are usually a necessity – lenders often want at least 10% down payment. But even if it is not mandatory, it is worth it. After all, it can save you money each month and help you pay less interest.
1. Lower monthly payment
Since depositing money reduces the overall amount you need to borrow, you can expect to pay less each month, which means a lower monthly payment.
It is easy to see the calculations. Use an auto loan calculator to estimate monthly payments. If you borrow $30,000 at 5% interest for 48 months, you will pay $691 per month. With a 20% down payment of $6,000, you reduce the amount you need to borrow to just $24,000. And that translates to a monthly payment of $553.
2. More fairness at the start
Equity is the difference between what you own for a car and its potential sale price. Large down payments increase your equity because you won’t need to finance as much through a lender.
Cars are a depreciating asset. As your vehicle’s value declines, you’re more likely to reverse your loan — when you owe more than your car is worth.
A larger down payment protects against depreciation because equity acts as a buffer. Since you own more of your car upfront with a higher down payment, you’re less likely to get stuck paying a loan that costs more than you could sell your car for.
3. Less interest paid
The biggest advantage of a large down payment is that it reduces the amount you need to borrow. When you borrow less, you pay less interest. More money in your pocket – and less in the lender’s – is always a good thing.
Just like the monthly payment example, a 20% down payment can make a big difference in the cost of a car loan. If you borrow that same $30,000 at 5% interest for 48 months, you’ll pay $3,162 in interest. With a down payment of $6,000, you will only pay $2,530 over the life of the loan.
4. Potentially lower rates
Some lenders may be willing to give you a lower rate if you have a large down payment. Because a down payment shows you know how to handle money, you’ll pose less risk to the lender.
There are a number of factors that influence your interest rate, such as credit score and income, so it’s far from guaranteed. Still, a large down payment is something lenders consider and can help compensate for areas where you may not be as strong.
Experts suggest depositing at least 20%
The most common advice is to deposit 20% or more on a vehicle. More, of course, is better. The less funding you need, the better.
But it’s a lot of money. In 2021, the average price of new cars reached $47,000 in December, according to Kelley Blue Book (KBB). A 20% down payment on that $9,400. Even used cars averaged $28,000, which equates to a 20% down payment of $5,600. These are averages, so you will definitely be able to find cheaper options. Just be aware that prices continue to rise due to global shortages of important parts like semiconductors.
You definitely don’t want to deplete your savings for a down payment. Take advantage of discounts if you want to buy new and shop for a good price on your old car. Selling it or trading it in at a dealership can go a long way to hitting that coveted 20% mark.
If you absolutely can’t afford 20%, it’s okay to only put in 10%. Some dealers who work with bad credit may only require a down payment of $1,000. Either way, try to put in as much as you can to avoid taking on a big loan that could upset you.
Avoid depositing anything
You should always have a down payment when buying a car. Some experts say it might not be necessary if you’re able to get 0% APR – but most people won’t qualify for this.
Dealerships offer financing with no down payment because they are likely to get the most out of interest. After all, it’s the opposite of a big down payment. Even with low rates, you will end up having to finance more. This means more interest paid and a higher chance of being upside down on your loan.
A no-down payment offer can also come with a long-term loan to offset higher monthly payments. This is the biggest trap. The longer your loan term, the more you pay the lender.
The more you can pay up front, the better off you will be. A 20% deposit is the amount to keep, but you can always put more if you can afford it. Just avoid paying less than 10% or $1,000, especially if you have bad credit, so you can always get a competitive interest rate.
Take the time to compare auto loans and find financing before you start shopping for a car. This way you will know exactly how much you can afford and how much you will need for a large down payment.