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How Much You Should Put Down on a Car

November 4, 2020

When it comes to getting financing for a new or used vehicle, you might be wondering how much you should put down on a car or whether you’ll need a down payment at all. While the final decision is up to you, the more money you put down, the less interest and lower monthly payments you’ll make.

The general rule of thumb for how much you should put down on a car is around 10% to 20% of the total value of the car at the time of purchase. Although, the ideal amount can vary due to one of several factors such as car depreciation and the willingness of the lender to finance you.

Read on to learn more about the factors that can influence your down payment and the total cost of the loan.

When & Why To Make A Car Down Payment

Generally speaking, you won’t need to make a down payment for most vehicle loans. However, some lenders might require one based on your credit score, make and model of the car, and your annual income.

Some car dealerships and banks will sometimes offer “no money down” loans. As the old saying goes, buyer beware. They often use these promotions as a marketing tactic to drive new sales. This often results in higher interest rates or an inflated purchase price.

The only situation where it makes good financial sense to put $0 down is when you can afford to purchase the car outright.

Down payments help secure a loan

If you have a low credit score, your lender might require you to put down a greater sum of money before they agree to finance the purchase. If this is the case, you might be able to negotiate a better interest rate, as a bigger down payment signals that you’re committed to buying the car and are a lower-risk borrower.

If you don’t have that kind of cash on hand or in your bank account, you can always bolster your initial down payment through trading in your current vehicle or applying a cash rebate that some dealerships offer on new car purchases.

You’ll owe less money

Putting more down initially means that you’ll pay less money over the life of the loan. This directly translates to lower monthly payments and could potentially influence the interest rate. You can use a car loan calculator to help you determine the exact amount of money that you’ll need to pay based upon how much you put down.

Offset depreciation

A new car begins to depreciate the second you drive it off the lot. Depending on the make and model, some vehicles will lose their value faster than others. When it comes to depreciation, the general rule of thumb is that new cars tend to depreciate the most during the first year after the sale.

However, if you get into an accident, make irreversible modifications, or put too many miles on the vehicle, it can decrease in value at a much faster rate. A sizable down payment can help reduce the chances of becoming upside-down on your loan—that is owing more than the car is worth if you were to sell it.

In addition to carrying full coverage car insurance, some lenders might also require you to have GAP insurance if there’s a chance of you becoming upside down on your loan. It will help pay for the difference between the value of your car and the balance of the loan at the time of sale.

By putting a bigger initial down payment, you’ll be able to offset the initial depreciation and prevent yourself from losing money should you need to quickly sell the car at a future date.

Determining How Much You Should Put Down On A Car

Several factors will determine the ideal down payment that you should make. If you have a low credit score, some creditors will require a higher amount before they approve the loan for a new car. This helps offset both risk to the lender and depreciation of the asset.

You should consider the overall length of your loan as well. For 24 to 36-month loans, a higher down payment will significantly help offset your monthly payments. For loans above and beyond 36 months, you can reasonably get away with offering less money. Keep in mind that you will be paying more interest over the life of the loan.

Get Financed Today!

When it’s all said and done, the ideal down payment should give you affordable monthly payments at an acceptable interest rate.

At Red River FCU, we’ll work hard to help get you financed so you can buy that car or truck you’ve always wanted.

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