Down to the details
You’ve done the research, you know your credit score and you’re ready to make a deal for your new car or new to you car. But what about financing? Unless you are paying cash for the vehicle you want, you’ll need to weigh your financing options carefully. One of the most important factors to consider is whether or not you will be making a down payment, and what amount you’re able to put down.
If you are buying a new car, it is recommended that you put down 20% of the total purchase price, and around 10% for a pre-owned car. It’s also important to know the value of any trade-ins you’re bringing to the table. A valuable trade-in can reduce the amount of money you should pay up front.
Why should you consider making such a sizable down payment
- You might be able to get better terms on your loan, such as a lower interest rate and lower monthly payments.
- You will reduce the amount you have to borrow. Most lenders do not want to lend 100% of the purchase price because you start out owing more than the car is worth, once taxes and interest are added. Even just paying a small amount up front or offering a trade-in will reduce the risk of your loan.
- You will have more equity in your vehicle right from the start. New cars begin to depreciate after you drive them off the lot. Avoid being upside down in your loan, and you will have more equity in your car.
- You’ll pay less interest! The less money you have to borrow, the less you have to pay back over time, which reduces the overall amount of interest you have to pay over the life of your loan. It’s as simple as that!
There are other factors to consider, of course. Is it a good time to borrow? When the economy is good, lending is less risky because (generally speaking) people can make their payments, which in turn encourages banks to offer lower interest rates. The flipside of this is also true, of course. If the economy is doing poorly, you’ll want to make a much larger down payment because interest rates are more likely to be higher. As with any loan, you will want to consider overall market conditions, as well as your own personal finances, to keep your personal debt levels manageable.