Buying a new car is exciting. It can also be stressful. As is the case with any big-ticket purchase, your goal is to get the item you really want at the lowest possible price. If you plan to finance your new car purchase, as most people do, the sticker price on your dream car is just one part of the financial equation. You also need to learn how your down payment and the interest rate on your car loan will affect how much you end up paying over the long term.
How Much Should Your Car Down Payment Be?
You have heard that 20 percent is the ideal amount for a car down payment. The truth is, most car buyers make down payments of about half that amount. Why? That’s all many buyers can afford to pay upfront. There is no one-size-fits-all answer to the question, “what is the ideal down payment for a car purchase?” The ideal down payment is the amount you can comfortably afford to pay without drawing from your savings. There are pros and cons to both large and small down payments.
Benefits of a Larger Down Payment
The most obvious benefit of a large down payment is your monthly payments will be lower. Additionally, if you can afford a down payment of 20 percent or more, you probably will not need to purchase guaranteed auto protection (GAP) insurance. A GAP insurance policy will pay the difference between the amount you owe on your car loan and the amount your insurance company will pay you if your car is stolen or totaled. One of the other important benefits of a larger down payment is people with substandard credit who can pay more upfront increase their odds of being approved for a car loan.
Drawbacks of a Larger Down Payment
Banks loan money to make money. They need to generate a certain amount of money on each car loan they approve. The more money you put down on your car purchase, the higher your interest rate will probably be. For example, if you’re financing a used car that costs $10,000 and want to put $5,000 down, there’s a good chance your lender will raise your interest rate to make sure it makes the required profit on your loan.
Regardless of Down Payment Amount, Financing Is Beneficial
Determining the amount of your down payment and your auto loan term can be confusing. You probably wish you could simply pay cash for your car and avoid the hassle of financing altogether. Don’t forget financing has its benefits! Being able to pay off your vehicle over time allows you to hold on to your cash. You never know when an unexpected expense will come up you don’t have the option to finance. It’s always smart to have savings on hand. Additionally, if you finance your car and make your payments on time, your credit score will increase, which can benefit you on future big-ticket purchases.
If you’re in the market for a quality pre-owned vehicle, contact us at DeBoer’s Auto Sales & Service in Hamburg. We’ve got an impressive inventory of cars, and we’ll help you secure an auto loan you’ll be happy with.