A down payment includes the cash you have on hand, the value of your trade-in and any rebates you qualify for. All of these work together to reduce the amount you need to borrow. They show lenders you are serious, which in turn can help you score a better interest rate.
In general, a down payment of 10 percent to 20 percent is best. But if you can afford to put down more, it can save you hundreds of dollars in interest.
4 benefits of making a down payment
Down payments are usually a necessity — lenders frequently want at least 10 percent down. But even if it is not required, it is still worth it. After all, it can save you money each month and help you pay less interest.
1. Lower monthly payment
Since putting money down reduces the overall amount you need to borrow, you can expect to pay less each month, which means a lower monthly payment.
It’s easy to see the math. Use an auto loan calculator to estimate monthly payments. If you borrow $30,000 at 5 percent interest for 48 months, you’ll pay $691 a month. With a 20 percent down payment of $6,000, you’ll cut the amount you need to borrow to just $24,000. And that results in a monthly payment of $553.
2. More equity starting out
Equity is the difference between what you own for a car and its potential sale price. Large down payments increase your equity because you won’t need to finance as much through a lender.
Cars are a depreciating asset. As the value of your vehicle decreases, you’re more likely to go upside down on your loan — when you owe more than your car is worth.
A larger down payment protects against depreciation because the equity acts as a buffer. Since you own a greater portion of your car from the start with a higher down payment, you are less likely to get stuck paying for a loan that costs more than you could sell your car for.
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