Purchasing a car is one of the most significant purchases you'll make in your life. For this reason, it's crucial that you carefully consider the various aspects of buying a car. One of the most important elements is how much of a downpayment you'll make when taking out a car loan.
The size of your downpayment can affect your loan in a few ways. It can affect your monthly payment amount, your interest rate, and your repayment term. Your downpayment may comprise cash, the trade-in value of the car you drive, or a combination of the two.
How Much of Downpayment Should I Make on a Car?
There is no one answer for how much money you should put down on a new car when it comes to car finance. This is because the size of your downpayment depends on a variety of factors.
If you're buying a new car, it's recommended that you put down at least 20% of the purchase price. This is because 20% is considered a substantial down payment, and a lender will likely extend better terms, including a lower interest rate. Additionally, a 20% downpayment could help protect you from depreciation. Depreciation is the continually shrinking value of your car. Your car starts to depreciate the moment you drive it off the lot and will decline about 20% in the first year.
Furthermore, a downpayment of less than 20% may put you "upside-down" on your vehicle loan. This means that you'll owe more on your loan than the car is worth. Therefore, if you sell the car while being upside down, you'll have to come up with the money to close the gap between the sale price and the balance of your loan.
Lastly, you have to consider what happens if your car is totaled or stolen. In these situations, your auto insurance policy will only cover the depreciated market value of your vehicle. This is known as "actual cash value" coverage. With this kind of coverage, you're on the hook for paying off the remaining balance of your car loan.
However, if you're buying a used car, a down payment of 10% will suffice. This will ensure that you don't end up upside down on the loan because the value of a used car has already depreciated quite a bit.
What If I Have Bad Credit?
If you have bad credit, then a 20% downpayment may not be enough. The more money you can put down on your car, the better, which will bring down the lender's risk. As a result, you may have an easier time getting approved for financing, and they may offer you better terms, such as a lower interest rate.
Should I Consider Making a Larger Downpayment?
It's always in your best interest to put down a larger downpayment. Some of the benefits of a larger downpayment include:
Lower monthly payments: The more extensive your downpayment, the smaller your loan's size needs to be. Therefore your monthly payments will be smaller.
Shorter loan term: A larger downpayment may make it possible to reduce the length of your loan term because your monthly payments will be smaller.
Less interest: A larger downpayment and a shorter loan term will result in fewer interest charges over the loan's life.
Although there are several benefits to a larger downpayment, you shouldn't stretch yourself too thin. You need to keep enough money in your bank account, so you can afford to pay for your other expenses without going into debt.
It may seem difficult to scrape together the money for a downpayment, but ultimately a downpayment makes managing a car loan easier. This is because the size of your downpayment will affect your monthly payment amount, your interest rate, and your repayment term. A downpayment of 20% of the vehicle's purchase price is the general recommendation because it will put you in a favorable light in the lender's eyes. Therefore, when shopping for a car, you should consider how much a 20% downpayment of the purchase price would be and determine what you need to do to come up with that amount.