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Financing a car loan is a major financial decision, and it involves a lot of tradeoffs. One of the most significant ones is how big of a down payment to make. The size of your car loan down payment will impact several things, including how much your monthly payments will be and how much interest you’ll have to pay on the loan. Let’s look at what you’ll need to know to figure out a good down payment amount for you.
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How Much Should You Put Down on a Car?
So what is a good amount to put down when you’re taking out a car loan? The typical down payment on a car is often quoted as 20%, but the truth is that not everyone pays that much. The average down payment on a new car in 2019 was just under 12%. But that doesn’t mean that that’s what you have to pay—or should.
Let’s say you buy a new car that costs $30,000 and have no trade-in. If you made a down payment on a car of 11%, that would be $3,300. You’d still have to take out a loan for $26,700. Over five years, your monthly loan payment might be around $500. Consider whether you can afford that amount over the relatively long term of your loan. This calculation doesn’t factor in car loan interest, which can vary depending on several factors, including your credit history, the length of the loan and how much you plan to borrow.
The right amount to put down depends largely on your finances and priorities. When you’re determining how much to put down on a car, look at the big picture, since this is a debt you will have for several years.
Benefits of Making a Down Payment
Some lenders don’t require a down payment on a car at all. Not paying a down payment can be tempting, especially if you don’t have a chunk of cash to spare. But, again, consider how that will impact the length of your car loan (or your term, as it’s called in car loan terminology) and your monthly payments. Making a down payment brings several benefits you may want to consider as you make your decision.
1. Your Monthly Payments Will Likely Be Lower
To state the obvious, the more you pay upfront, the less you’ll still owe. That means that potentially, your monthly payments will be lower than they would be if you make a smaller down payment. That can help your monthly budget going forward.
2. You’ll Pay the Car Off Faster
When you pay little to none upfront, you’ve got more work to do to pay off that car loan. Down the road, your loan might even become an upside-down auto loan, meaning you owe more than the car is actually worth. Making a decent down payment on a car may make it easier to take a shorter repayment period (since your monthly payment will be lower). That means you might be able to pay your car off in two or three years, for example, rather than five or six.
3. You May Get a Lower Interest Rate
When you opt for a shorter repayment period, lenders may offer you a good interest rate on a car loan, which means you’ll pay less over the life of the loan. Also, a larger down payment can indicate to lenders that you’re less of a risk because you’ve made the effort to put more down. That may sway them to lower your interest rate.
Disadvantages of Making a Down Payment
There are disadvantages to making a down payment to consider when you’re car loan shopping as well.
1. You May Be Cash-Poor
If you don’t have thousands sitting in your bank account to put down on a car, it might be a struggle to put any money down. You need a car, but you might not be able to easily afford it if it involves a down payment. You may have to wait longer than you’d like while you set aside money so that you can afford the down payment.
2. You May Not Get a Lower Rate
If you have bad credit, you might not get a lower interest rate when you make a down payment. While bad credit auto loan refinancing and loans do exist, they don’t typically offer the best rates, so you may pay more in the long run than if you had good credit.
4 Tips to Save for a Down Payment on a Car
If the idea of coming up with thousands of dollars for a down payment on a car seems daunting, here are tips to help.
1. Start Saving Early
If possible, start setting aside even just one or two hundred dollars a month as long as you can before you want to buy a car. That way, you’ll have a nice little nest egg saved when you’re ready to buy. Saving just $100 a month would get you $1,200 in a year.
2. Cut Your Spending
If buying a car is a priority, you may have to cut back on other areas of your spending. How much do you spend dining in restaurants? Do you really need all your cable channels? Could you lower your cell phone bill by switching providers? Spending a few minutes to determine where you can cut back could help you find more cash to set aside for your down payment.
3. Know How Much You Need
It’s easier to save if you have an end number in mind. Shop for cars and decide whether you want to buy a new or used car. (Opting for a used car, which is likely to cost less, can also help you save dough.) Then research how much the model you want would cost. From there, decide how much you want to make as a down payment. If you can pay 20% of the price and be in good shape with your monthly loan payment, you’ve got a number you can set as your target for saving.
4. Sell Your Stuff
Most of us have things sitting in our garage or storage space that we no longer use, like exercise equipment or tools. Selling things you don’t need in a garage sale or on Craigslist could also help you raise some cash.
Alternatives to Making a Large Down Payment
If you can’t afford to make a large down payment, you do have a few other options that can keep your monthly payments lower.
1. Trade in Your Old Car
If you have a car you can trade in when you buy another one, it can lower what you pay. It may also mean that you don’t have to make a cash-down payment. You can research the trade-in value for your car on sites like KBB.
2. Take the Shortest Payment Term You Can Afford
The shorter your repayment period, the lower the interest rate you might qualify for. The average car loan length is 72 months, but if you can afford the monthly payments for a shorter period, like 36 months, you’ll get a lower interest rate. Plus you’ll pay less interest over the life of the loan than you would if you stretched out your term.
3. Pay Your Car Off Early
Paying off your car loan early can save you several hundred dollars in interest. Even if it’s a strain to pay extra on your loan each month, you’ll be rewarded with a future of no payments at all! Just be sure to check your contract to make sure there are no prepayment penalties.
Making a down payment when you buy a vehicle can make buying a new or used car more affordable and may help you get a lower interest rate.
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