Buying a car can be an exciting experience, but there are many different components to understand. An important part of financing your new, or new-to-you, car is your down payment. You may be wondering how a down payment works and how much you’ll need to pay for your vehicle upfront. Check out this guide to learn more and help you decide how much you’ll want to pay for a down payment.
What is a Down Payment?
A down payment is the initial payment that you make towards your car purchase. The down payment amount that you pay can have a big impact on your auto loan. As a buyer, you have some flexibility with the down payment amount you choose to pay, especially if you’d like to put down more money towards the loan.
Benefits of a Down Payment
There are many benefits that a down payment can have when it comes to your auto loan. A down payment lowers the overall amount you’ll be financing with the loan, lowering your monthly payments. This in turn means that you may be able to afford a shorter loan term option. Both the lower financed amount and shorter loan term help make your loan less of a risk and can help you receive a better interest rate overall, helping you save money throughout the loan.
Additionally, putting down money for your down payment can improve your loan-to-value (LTV) ratio. This ratio looks at how much is being borrowed on the loan in comparison to what the vehicle is actually worth. Having a better LTV can help you get approved more easily as well. You’ll be able to offset some of your vehicle’s depreciation, which is when the value of your car decreases. When the value of your vehicle is lower than the amount you owe, you are upside down in the loan – something you want to avoid whenever possible.
How Much Should I Pay for a Down Payment?
Now that you know some of the benefits of a down payment, you’re probably wondering how much you’ll need to pay for your down payment. There isn’t a set minimum that you have to pay for a down payment on a car. In fact, some dealerships will promote special offers that require no down payment. In contrast, however, some financing options may only be available in your situation if you have a down payment.
You don’t want to put yourself in a financial bind by putting too much of your money down on a car, but you should keep the benefits of the down payment in mind when considering your options. Traditionally, it’s recommended to put at least 20% of the purchase price down if you’re purchasing a new car, or at least 10% down if you’re looking at a used car.
The amount you decide to put down will likely vary based on your situation. If you’d like to explore down payment options and see the impact they could have on your auto loan, we recommend utilizing an auto loan calculator.
Your down payment can have a big impact on your overall auto loan – something to keep in mind as you review your down payment options. Take the time to discuss and explore your options with your lender to find a loan that is the right fit for you.