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Categories:   Auto Loans & Financing    Consumer Credit   

What is an Auto Down Payment?

Thinking of buying a car in the near future? If so, then you must have considered financing.

Buying a car is a large purchase, like buying your first home, and not many people can afford or would even want to pay in cash. If you choose to finance the purchase of your car or home, the largest expense you will have to deal with is the down payment.

Like is the case with purchasing a house with a mortgage, an auto down payment is an upfront amount you put down from your savings. Some dealerships and lenders will require you to provide a certain percentage of the price of the car.

The down payment covers part of the total cost of the vehicle, while the balance is spread out over a period of time.

How Much Down Payment Should You Pay?

How much money do you think you can put down as a down payment for your new vehicle?

Providing a smaller amount of down payment means you’ll get a slightly more expensive financing deal. On the other hand, offering a sizable down payment gives you a better loan deal and reduces your debt burden in the long run.

So, how much should you set aside for your car down payment? Here are some of the things you need to consider to make the right decision.

A Large Down Payment is Always Good

Before you approach the dealership or bank, think about the car you want to buy, how long you will use it, and how much it will end up costing you. Even though you are essentially buying on credit, it’s good to make a large deposit as a down payment.

You want to make a large auto down payment for the following reasons:

  • Less money “borrowed”. Buying a car with finance is basically borrowing money and paying it back with interest over a specified period. The bigger the down payments you offer, the lower the interest costs you have to deal with, and the less time you will have to pay for the vehicle.
  • Low monthly payments. By making a big down payment, you can negotiate smaller monthly payments with the lender.
  • Lower interest rates. Lenders prefer borrowers who offer a large down payment because it reduces their risk. Providing a large down payment will put you in a better bargaining position as it shows the lender that you have the ability to fulfill your debt obligations.
  • Low credit score buyers need a larger down payment.
  • Fasten your car’s equity growth. A new vehicle can be an asset, which can be used as collateral for other loans. Providing a large down payment gives you more equity into your car and the growth of its due equity.
  • Depreciation. Cars depreciate fast. Therefore, you don’t want to be stuck with payments for a car whose value is way less than what you are paying.

When Should You Offer a Smaller Down Payment?

Large down payments are always good. However, in some situations, you should consider offering a smaller down payment. Here are examples of some of the situations:

  • Old or used cars. Buying a used car can be risky. It’s therefore acceptable to make a smaller down payment to start using the car to see how it performs in the short term. This is why some used car dealers even offer “zero down” vehicles.
  • You need a vehicle fast. When you need a car urgently, it can be challenging to save up to 40 or 50% of its value to offer as a down payment. In this case, a smaller down payment can be made to serve immediate needs.
  • You have low or no savings. While large down payments are ideal, it’s not advisable to wipe your entire savings account for an auto down payment. Emergencies happen, and the car could develop issues that need money to fix. Don’t forget that you will also need to pay for insurance, taxes, fuel, and other running costs.

What is the Ideal Auto Down Payment Percentage?

Ideally, you should aim at providing at least 20 percent or higher as a down payment for a new car. Most car financiers require at least 10 to 15 percent down, depending on the vehicle model you want and your creditworthiness. Speaking of credit scores, a better credit score attracts lower interest rates from lenders. Therefore, work to improve your credit score before applying for car finance.

The amount of money you should put down on a vehicle will depend on several factors, such as the type of car, your budget, and other personal considerations. It’s advisable to avoid taking significant debts for depreciating assets like vehicles. This is why offering a sizable down payment is recommended in most cases.

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