What Kind of Down Payment Do I Need to Finance a Car?
Financing helps the automotive industry offer vehicles to millions of families. It is rare that a household will have thousands of dollars at once to buy their dream car. Thus, automakers, credit unions, banks and other financial institutions offer car loans to help drivers get a car and repay the loan over a period of time. A key part of the loan is the down payment. By determining the right amount, you can get a deal that works in your favor for short-term as well as long-term.
Benefits of a Down Payment
For a buyer, a substantial down payment can have multiple benefits. First, a higher down payment will ensure that you get a lower interest rate from the lender. It will also help you shorten the term of the loan so you can own the car much faster. You can also choose to reduce the amount of your monthly payment or keep the amount the same and reduce the tenure. These factors are true for both new and used cars.
When you look at it from a lender’s perspective, the finance company gets some cash at the beginning itself. It also shows that the borrower has the financial ability to accumulate the cash and will probably pay off the loan on time. In case of new cars, a down payment also helps to offset the depreciation that occurs when you drive a car off the lot.
How Much Down Payment Do You Need?
If you’re leasing a car, the required initial payment or the cash due at signing is usually pre-determined. So rather than following a loan strategy, it is better for customers to stick to the required amount of cash due. In the case of a used car, you should put down 10 percent or more of the car’s sale price. This means that if you’re buying a vehicle for $12,000, you should put down at least $1,200 as a down payment. Since used cars don’t depreciate as fast as new cars, lenders tend to require a higher down payment on new cars. Normally, a down payment of 20 percent or more is considered wise when you’re buying a new vehicle. So if your car is for $30,000, you should put down $6,000 and finance $24,000.
Not Just Cash
You might not always need to arrange all the cash required for the down payment. You can either pay with a trade-in vehicle or a cash rebate on your car’s purchase. If your dealer is taking a trade, the value of the car is mutually agreed upon by the owner and the dealer and then deducted from the price of the vehicle you want to buy. This holds true for new cars, used cars and new car leases. In some cases, you might get a rebate on a new car too, and in such instances, the rebate amount is also deducted from the purchase price.
What it Means for You
Before heading to the dealership, do the math so that you know the value of rebates, trade-ins and how much cash you need to put down. This will help you get the right quote on a lease or a loan from your dealership or a financial company.