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It’s the time of year for many of us to think about buying a brand new car. Because cars are so expensive (and because you don’t want to be one of the tens of thousands of people who default on car loans every year), it’s a very good idea to determine how much cash you should put down on your next car before you head to the dealership.
When you first go car buying, you should consider the total cost of the vehicle you want. Going into the showroom with a specific price range in mind can assist you to avoid becoming distracted by the flash and glam of the vehicles on display. Before you start car shopping, you need to have a thorough understanding of your own financial status.
Why Do Banks Require a Down Payment?
A downpayment is frequently demanded by a lender to offer the security they require in the event that you default on your payments. Furthermore, a down payment covers the difference in car value between the time it is sold and the time it leaves the lot. Most lenders will not lend you more money than the automobile is worth because they risk losing money if the car is repossessed. As a result, lenders typically want a down payment of 10% to 20% of the car’s purchase price.
The Cost of a Car and Down Payments
The amount of money you put down on a car will mostly be determined by two factors. Your own money and obligations, as well as the price of the car you wish to buy. When it comes to down payments, the cost of the car is important because it dictates how much money you’ll need to save.
If you buy a Honda automobile, you will most likely require a smaller down payment than if you buy a Mercedes car. A 5,000 dollar down payment on a car that costs less than 20,000 dollars is a significant down payment. A 5,000 down payment is a standard/low down payment for an automobile that costs more than 40,000 dollars.
What Is the Appropriate Amount to Put Down?
When it comes to determining how much you need to put down for a down payment on a vehicle, the secret formula is monthly payments plus the overall price. You’ll need to buy a reasonably priced vehicle or put down a higher down payment if you want to keep your monthly payments low.
The length of your automobile loan will assist you to determine how much you’ll have to pay each month for the vehicle. For example, if you take out a $15,000 automobile loan with a 7% interest rate and a 5-year term, you will spend $297 each month on the loan. If you decrease that time span to three years, you’ll be paying roughly $463 per month for the car. The lower the monthly responsibility, the more money you put down on the car and the longer the payments are. When deciding on a loan period, keep in mind that the longer the loan term, the more interest you’ll pay.
Buying a New Car vs. Buying a Used Car
Similarly, depending on whether you’re buying a new car, a used car, or leasing a car, the amount of money you’ll need for a down payment will vary.
- If you’re buying a new car: Putting down a 20% down payment is an excellent method to avoid owning more than the car is worth. Because of the rapid depreciation of new vehicles, a 20 percent down payment is a decent rule of thumb.
- When buying a used car: A 20% down payment is still a fair rule of thumb, but your lender may likely take a lower down payment. The lender does not have to worry about compensating the initial depreciation produced by a new car leaving a lot because a used car has already experienced some depreciation.
- If you’re leasing a new car: It’s ideal to put down as little money as possible as a down payment. The amount, on the other hand, is usually established by the provider, and there isn’t much leeway.
Tip: If you want to upgrade your old automobile to a new one, you can use your old car to pay for the down payment. Depending on the value of your old automobile, you may be able to partially or entirely cover the down payment by trading it in.
Is it Possible to Put Down Zero on a Car?
Zero-down vehicle loan offers are uncommon, and they are normally reserved for people with excellent credit. While putting a $0 down payment on an automobile sounds appealing, there are some disadvantages. For one thing, zero-down car retailers frequently charge higher financing rates. Second, paying nothing upfront will result in larger payments or, at the very least, a longer payback time. Finally, due to depreciation, putting zero down may result in you owing more than the automobile is worth.
Benefits of a Down Payment in Auto Financing
Down payments provide you with a lot of advantages in addition to protecting the lender.
- Car Loan Approval is Easier: When you have a substantial down payment, your lender will feel more secure and confident in you. As a result, even if you have terrible credit, you may receive faster approvals.
- Better Financing: The larger your down payment, the better your lender’s rates and terms will be.
- Depreciation: New cars depreciate quickly, particularly in the first few years of ownership. A down payment is required to prevent owing more than the vehicle is worth. For example, if you calculate the total cost of your car, your insurance may only pay out the amount equal to the car’s worth, not the amount you owe your lender. As a result, you’ll have to pay the remaining balance out of your own money.
- Affordability: Your monthly payments will be cheaper and more affordable if you put down a larger down payment.
The Bottom Line
Buying a car, whether new or secondhand, is a major investment and a significant financial commitment. Make sure you have 20% saved for a down payment and shop around to several lenders and dealerships to obtain the best offer.
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