Financing a new vehicle is a big decision and lenders often want to see that you can make a down payment as a way of showing your commitment to paying back a loan. Putting money down is likely to be the first payment you’ll make when you purchase a vehicle. It’s normally seen as a percentage of the car’s price.
In general, a down payment on a new car should be no less than 20% while it can be no less than 10% for a previously owned vehicle. For example, if you’re buying a used vehicle with a price tag of $20,000, a down payment of 10% would be $2000 at purchase. This payment can be made in cash or you can trade-in your old car to help put money towards the down payment.
Wondering what the benefits of making a down payment are? Let’s review five reasons why paying a portion of your vehicle upfront can help you now and in the long run.
1. Make it easier to get approved for a loan
A down payment can help you qualify for a loan more easily. This can be especially helpful if you are trying to access financing with a low credit score. A down payment can reduce the risk that a dealer or financing company will lose money if you get into a position where you can’t repay the loan.
2. Smaller loan and less interest
You’ll end up with a smaller loan if you put down an initial payment on the car you wish to purchase. With a smaller loan, you’ll also end up needing to pay less interest. A lower loan-to-value ratio may mean you’ll get a lower interest rate. This ratio considers the amount you borrow against the value of the vehicle. Paying back a smaller loan with less interest can save you a substantial amount in the long run.
3. Smaller monthly payments
Reducing the amount you will borrow to finance a vehicle by making a down payment will likely lower the amount of money you’ll need to pay monthly. You’ll feel good about not having to put such a large portion of your monthly budget towards a car payment.
4. Offset depreciation
It’s often said that a new car loses value as soon as you drive it out of the dealership lot. New cars can lose about 25% of value in their first year alone. While new cars have a faster rate of depreciation, all vehicles end up losing around 15% of their value each year.
Without making a down payment, you could end up owing more than your vehicle is worth just by driving your car off the lot. This would make it difficult to get the money to pay back what you owe on the car and making it tough to sell or trade your vehicle without suffering big losses.
5. Qualify for special programs
Special financing programs or incentives with lower interest rates may be available if you are willing to make a larger down payment. Read the terms associated with any of these promotions and ask your dealer any questions to ensure you understand the terms and requirements.
If you’re not in a rush to purchase a car, consider taking the time to save up for a down payment. After you’ve put away some savings towards a car, you’ll be ready to go out, shop for a car loan, and find your ideal ride.
Making a car down payment can save you money in the long run and increase the chances that you’ll be able to finance the vehicle you desire. This is especially true if you don’t have a perfect credit score. Instant Auto Loans can help you finance the car of your dreams with car collateral loans processed in 15 minutes.