What Kind of Down Payment Do I Need to Finance a Car?
A number of banks and credit unions offer auto loans to customers so that they can fulfill their dreams of buying a car even if they don’t have all the cash. However, if you can pay some money down, you only need to borrow a loan for the balance price of the car. This can help you repay your loan quickly and you can also save on interest that you pay to your lender. If you don’t pay any down payment, you’ll have to take a 100% loan and many financial institutes refuse a complete loan due to the risks associated with loaning such a large amount. Let’s look at down payment in detail so that you can make an informed choice when buying your next car.
The Effects of a Down Payment on Your Loan
If you pay a higher down payment, you will finance a smaller amount for your car. This will help you repay your loan at a faster rate and also, you’ll shell out less money for your monthly installments.
If you choose a loan term that’s longer, your monthly payments are reduced. However, in such cases, you’ll probably still be paying off your loan when your car needs expensive repairs and it can put a major dent in your budget. If you choose a short loan term, you’ll have to spend a lot of money every month. The ideal scenario is to find the balance and pay as much as you can in your down payment. This way, you can choose a medium-term for your loan, ideally between 36 and 60 months.
By paying a down payment, you can save quite a lot of funds in the future. This can enable you to buy an upgrade and choose a higher priced car. So by simply putting down some money, you can actually afford a car that might seem out of your budget otherwise.
Approvals & Interest Rate
If you pay a down payment, you have a much higher chance of getting your loan approved as the risks associated are less. It is also a good idea to pay a substantial down payment if you don’t have a good credit score. This will reduce your loan amount and the lender will be assured that you’re capable of repaying the loan. When you borrow a smaller amount for your loan, you can also avail lower interest rates, helping you save a lot of money over the course of your loan.
Ideally, it is recommended to pay at least 20% down payment for new cars and 10% for used cars. Though this figure may seem aspirational for many, try to get as close to the number as you can so that you can find your dream car with great financing terms. By putting down some cash, you can also offset the depreciation, especially in the case of new cars and avoid being upside down on your loan.