The right down payment on a car has the potential to make a significant difference to a vehicle purchase and how financing pans out, so it’s worth seriously considering how much you might be able to pay up front.
By lowering the amount borrowed, a down payment may save the buyer money by reducing the monthly payment and finance costs, but there are other considerations as well.
A payment of 20 percent has long been viewed as a healthy amount for a new car purchase, according to Edmunds. And when you consider factors like new-car depreciation of 20 percent in the first year, you get a better understanding why.
Paying a fifth of the car’s value at purchase is one way to help avoid financial road bumps like becoming upside down on a car – when you owe more than the vehicle is worth – advises Debt.org.
By no means do all buyers make a down payment on a car in the region of 20 percent, though. Money down averaged just 10 percent for new and used cars in 2015, Edmunds’ research reveals, which may simply be because that’s what people could afford. For used cars, with typically lower prices and slower depreciation, a figure like that is not a bad thing, says the automotive information site.
Bearing in mind the advice from the experts, run the numbers for your own circumstances to help decide what’s right for you.
Estimate the effects of a car down payment on financing
Car loan calculators enable you can estimate how different down payment amounts affect potential financing.
Start off with RoadLoans’ budget calculator to gauge what you can afford for a monthly car payment. Then use the affordability calculator to enter that figure, along with loan term, annual percentage rate (APR) and down payment, to estimate what you can spend on a vehicle in total. Raising and lowering the money down figure will affect the total.
The payment calculator enables you to see the effects of car down payment, loan amount, loan term and APR on a potential monthly car payment, and how more money down may reduce the payment.
For example: A loan amount of $25,000 with a 60-month loan term, four percent APR and a 10 percent down payment of $2,500 results in an estimated monthly car payment of $414. Increase the down payment to $5,000, or 20 percent, and the payment drops to $368.
Of course, other factors, such as a shorter loan term and lower APR, may also drop the estimated payment and potentially the amount of money paid in finance charges over the life of the loan.
Remember that cash, a trade-in or both may be used as a down payment on a car. You can find out the value of your existing vehicle at websites like Consumer Reports, Edmunds and Kelley Blue Book, advises the Consumer Financial Protection Bureau (CFPB), then decide whether you want to sell it privately or trade in at the dealership.
When you’re planning ahead and looking to save for a down payment, think about tax season. Tax refunds in recent years have averaged about $3,000; all or part of which might make a useful contribution for a down payment on a car.
Potential advantages of a down payment
These are some of the ways a down payment may help when financing a vehicle:
- Lowering the amount borrowed and, potentially, reducing finance costs
- Increasing the down payment amount may decrease the interest rate a lender offers, advises the CFPB
- Offsetting vehicle depreciation and helping to avoid the possibility of becoming upside down on a car loan
- Strengthening an auto loan application for consumers with bad credit* or no credit history, such as first-time car buyers, to improve their chances of approval
Financing options and finding a quality vehicle
Having gained an idea of what kind of auto loan terms may work for your finances and car-buying needs, consider checking your credit reports to catch any errors or inaccuracies that might limit access to credit and the best possible interest rates.
Then shop for auto loans with different lenders to compare loan terms, and try online lenders like RoadLoans.
As a direct-to-consumer lender, RoadLoans enables you to apply for a preapproved car loan in your own time, from work, home or on the go. Our simple application takes a few minutes to complete and you’ll get an instant loan decision. All credit types can apply.
If approved, shop with the confidence of a cash buyer knowing the terms of your financing, and focus on negotiating a great price for your vehicle. Our national network of dealers offers quality new and used cars, SUVs and trucks meeting our standards for age, mileage and financing.
Ready to find financing? Apply for a car loan with RoadLoans and get an instant decision.
* “Bad” or “Poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press), Bankrate.com, Credit.com, Investopedia, NerdWallet.com and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by RoadLoans.com and Santander Consumer USA.