The Role and Importance of a Down Payment in Buying a Car


Down Payment in Buying a Car

If you are like many consumers, you don’t have the cash on hand to purchase your next vehicle in cash. Therefore, you will likely seek financing, whether from a bank or a dealership. Most of these loans require a downpayment. This is what you should know about your downpayment.

Role of a Downpayment

Did you know that the moment you drive your new vehicle off the lot it starts depreciating in value? In fact, the greatest amount of depreciation occurs during the first year of its use. For example, you find a new Nissan for sale and purchase it. By the end of the first year, your vehicle is worth up to 20% less than it was when you saw it for sale.

Your downpayment pays this depreciation for the lender. If you default on your loan, your lender can sell the vehicle for at or less than the amount you owe. This payment also suggests that you will repay the loan amount because you would lose all that cash if you default. Your bank wants to know that you have the ability and motivation to pay the loan in full.

Importance of a Downpayment

When you pay a downpayment on your car loan, you get skin in the game. This loss of money encourages you to continually see the value in paying your debt and gives you equity in your asset. In addition, it reduces the amount you have to pay overall. You also reduce your risk of default. In most cases, your lender will require a downpayment.

Benefits of a Downpayment

The most visible benefit is that your payment every month will be lower. You also won’t pay as much interest on your loan. In fact, you may receive a lower interest rate. You also have more equity in your vehicle, protecting you from depreciation

Lenders also look more favorably on applications that have a downpayment, reducing the likelihood of a rejection. Dealerships may also offer you special incentives or approve you for special programs.

Amount of Downpayment

In most cases, the amount of your downpayment should be 20% of the total cost of a new vehicle and 10% of the cost of a used vehicle. The 20% covers the first year’s depreciation amount. However, many consumers today only put down 10-20% on new cars.

If You Can’t Afford a Downpayment

You may find times when you need a car loan but cannot afford to pay a downpayment. If your credit score and income are high enough, you may qualify for a zero-down payment program. However, you should also purchase gap insurance, which covers between your vehicle value and what you owe. You can also purchase insurance that pays for a new car if yours gets totaled.

If your credit is not great, you may have to find someone who will cosign your loan. You need someone with great credit, and this person will take responsibility for making the payments on your vehicle if you default. Finally, you can purchase a used car that doesn’t cost as much, allowing you to borrow less.

Your Downpayment Decision

As you prepare to purchase your new or used vehicle, investigate all your financing options. Choose your downpayment based on your financial situation so you can enjoy the benefits of car ownership.

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