Top Benefits Of Putting A Down Payment On A Car
Buying a car can be a costly process and there are various financing options you should consider. One of these considerations would be the car down payment. A car down payment is the money or cash that is paid upfront for the vehicle.
Most lenders require a down payment and it can also bring various benefits in helping you to pay for the car. The down payment is the first payment you make when you purchase the vehicle and is usually a percentage of the car’s overall price.
For example, if you choose to purchase a $50,000 car and there is a 10% down payment, you would be paying $5000 for the down payment at the time of sale. Most lenders require a down payment to receive immediate compensation for the car at the time of purchase and to prove your commitment to repaying the loan. There are various advantages to putting a down payment on a car and here are some of them.
This is one of the most important reasons for a down payment on a car. Making a down payment will reduce the amount of interest you pay throughout the car loan. This is because the higher your down payment amount is for the car, the lesser you need to borrow for the car.
For example, if you intend to purchase a $50,000 car with a 5% interest rate over five years, that will amount to a total interest of $6,613.70 throughout the loan. However, by simply paying a down payment of $10,000, assuming all other conditions are kept constant, the amount of interest paid throughout the five years will be $5290.96.
This is a difference of $1322.74 in interest payable, simply due to a $10,000 down payment. Not only will you be able to save more money by paying less interest, but you may also obtain lower interest rates due to having a lower loan-to-value ratio. The loan-to-value ratio is one of the factors which affects the interest rate payable for a car loan.
Lower Monthly Payments
Similar to the interest example showcased above, putting a down payment on a car will result in lower monthly payments. This is because you have a lower loan amount. The higher your down payment, the lower your monthly payments.
Referencing the same example above, having a down payment of $10,000 would result in a monthly installment of $754.85. However, by paying a down payment of $20,000, the monthly installment would be reduced to $566.14. This is a difference of $188.71 due to a $10,000 difference in the down payment amount. Having lower monthly installments would allow you to allocate your finances to other pressing matters.
Vehicles lose roughly 15% of their value each year after usage. However, new cars have a faster rate of depreciation and can lose up to 25% of their value in the first year alone. Depreciation could leave buyers paying car loans in a painful situation, which is that they owe more money on the vehicle loan than it is worth.
This would make it difficult to sell or trade your car. Paying a substantial down payment reduces the gap between your vehicle’s current value and the remaining loan amount, thereby greatly reducing the chances of your vehicle having negative equity.