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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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Related: What does an extended warranty cover on a car?
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.
The Takeaway
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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This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.
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How to save up for a car
Does anything feel quite as good as hitting the open road in a shiny new car? Alright, a hot stone massage might feel better, but it’s still pretty hard to resist that new car smell. Buying a car should be a celebration, but often it can bring financial stress into your life. That’s why it’s important you take your time saving up for a car.
Learning how to save for a car may not be as fun as the road trip you’ve been fantasizing about, but it’s a necessary step if you want to buy your car in a stress-free way. We’ll break down the ways to save for a car so you can spend more time checking out roadside attractions and less time worrying about your bank account.
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If buying a new car is your plan, start your research by comparing a variety of makes and models. Figure out what’s right for your needs and budget. You can visit dealerships in person or review manufacturers’ websites to research car models that catch your fancy. Don’t be afraid to ask questions! Ask car sellers to clarify any fine print in their advertisements and try your hand at haggling for a better deal.
When shopping for a car, you should take advantage of any deals you can find such as rebates and special dealership offers. You can receive quotes from multiple dealerships—make sure you ask them if the price quoted includes deducted rebates. This process may feel tedious, but it will help you learn which make and model you can afford.
Purchasing a used car can potentially save a lot of money. If you find your dream car for sale as a used vehicle, you may need to be prepared to make the purchase quickly before someone else purchases the car.
That’s why it’s important to determine how much you can spend on a used car before you begin your search. The last thing you want is to feel pressured into spending more than you can really afford because you think a good deal is slipping away.
Purchasing a used car can potentially save a lot of money.
Before you begin shopping, review the used car market for the makes and models you are considering, to get an idea of what it may cost for you to buy the used car you want.
Before you purchase a used car, it’s good practice to follow the steps recommended by USA.gov for your financial and physical protection.
Steps like finding out if the car has any recalls, researching if the warranty is still in effect, and having a mechanic inspect the vehicle before making a purchase will hopefully keep both you and your wallet from being injured.
Ridofranz / istockphoto
Parting with a solid chunk of cash is never fun, but an appropriate down payment can help to make your car repayment process more manageable. There are two ways you can go about calculating your down payment:
Option 1: You can choose a make and model based on how much you’ve already saved for a down payment.
Option 2: Pick out which make and model you’d like to buy, get a price estimate, and then determine how large you’d like your down payment to be.
A 20% down payment is often recommended when purchasing a car, but this is not a set rule. Generally, the higher the down payment is, the lower the interest rate on your loan may be. Your down payment amount should ideally help bring your monthly loan payments to a cost you can afford.
If you have the cash flow to be able to purchase your car outright, then you can skip step three. Also, congrats, that’s a huge accomplishment! But if you can’t, there is no need to feel alone. 44% of American adults have auto loan debt.
DepositPhotos.com
Buying a car can cost a pretty penny. According to a report from Experian, the average monthly car payment was $554 for a new car and $391 for a used car.
If you want to determine how much your monthly car payment will be, you can sit down and crunch the numbers, or you can let the Cars.com car loan calculator do the work. This calculator is designed to help you estimate what your monthly car loan payments will be throughout the life of your auto loan.
The process is fairly simple. To use the calculator, enter the vehicle price, down payment amount, trade-in value (if you are trading in a vehicle), sales tax rate, interest rate, and the rate of your loan.
The calculator will take care of the math and present you with your estimated monthly payment. Next, it’s time to figure out how to save up for a car.
DepositPhotos.com
Unfortunately, the need to buy a car doesn’t always happen according to schedule. An unexpected breakdown, pricey repairs, or a change in your commute can all speed up your car-buying timeline.
An unplanned car purchase can lead to copious amounts of stress and unnecessary costs.
If you are able to, one good idea is to create a savings plan in advance of buying a car so you can take your time making such a big financial decision—and it could help you find more affordable options.
An unplanned car purchase can lead to copious amounts of stress and unnecessary costs.
Steps one through three should have given you a decent idea of how much money you’ll need to save for a down payment, and how much money you’ll need to budget each month after you purchase your vehicle.
One approach to saving is to take the amount you’ve determined you’ll need for a car upfront (don’t forget to subtract any money that may come from selling or trading in your current car) and divide it by however many months you have left until your ideal purchase date.
The number you get after doing this equation is how much money you should be saving each month to meet your goal. You might also think about saving more than that per month so you can prepare for your monthly payments.
And if you’re currently driving an older vehicle that is prone to issues, you may want to save a little extra as a cushion for any necessary maintenance or repair costs. Remember, saving for a car can take longer than you’d planned and that’s okay.
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Learning how to save money for a car can take a little trial and error. If you need to boost your saving efforts, consider a cash management account that allows you to spend, save, and earn all in one place.
That means the money you put aside for your new car could help you earn even more money. Happy driving!
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