What Should Be the Down Payment for My Car?

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What Should Be the Down Payment for My Car?

It has been long claimed that a 20% down payment is the magic figure when it comes to auto loans. However, the vast majority of people put down much lesser amounts.

This raises a few issues: 

  • Why are people paying such a low price? 
  • Is the 20% down payment rule still valid? 
  • Are there any disadvantages to paying a lower down payment? 
  • What is the magic number if it isn’t 20%?

Check out the following tips for down payment whether you’re buying a new or used car. 

Down Payment on a New Car

Is it possible for you to put down a 20 percent deposit? If that’s the case, it might be worthwhile. Why? When you put down a large down payment, a lender may offer you better conditions, such as a lower interest rate.

In addition, a 20% down payment may protect you from depreciation. Depreciation refers to your car’s value decreasing over time. In the first year, the value of a new car dropped by roughly 20%, and the following year, there was even more depreciation.

A down payment of less than 20% may cause you to be “upside-down” on your automobile loan, meaning you will owe more than the car is worth. You’ll need to come up with the money to cover the difference between the sale price and the loan debt if you sell the car while you’re underwater on a loan.

Another item to consider is if your automobile is totaled or stolen. If you have “actual cash value” coverage, your auto insurance policy would only pay the depreciated market worth of your vehicle. In most cases, “replacement cost” coverage would pay you more money if your car was totaled or stolen. You will then be responsible for paying off the remaining balance on the auto loan if you have actual cash value coverage.

Down Payment on a Used Car

What if you’re getting a loan to buy a used car? In this situation, a 10% down payment might be enough to keep you from defaulting on the loan. This is because the value of a secondhand car has already deteriorated significantly.

Is it a Bad Idea to Go Zero Down?

In some situations, it may be OK to put no money down—for example, if you don’t have any other options and can’t afford to pay anything down. Dealerships are well-versed in adopting a zero-down method to attract customers in the door. However, the only time you should take advantage of this is if you’re buying the car outright and they’re offering 0% financing.

In such a situation, you may put your money in an interest-producing savings account while making auto payments, generating interest on your money. But make sure you don’t touch the money you set aside for the car; otherwise, paying off the 0% loan over time won’t make sense.

What if you can’t afford to put down a deposit?

While putting down a deposit is preferable, not everyone can do so. If you are unable to raise funds, you have a few options to secure your finances.

Invest in gap insurance. This coverage bridges the difference between what your insurer would pay for your car if it were totaled and the amount you owe on it.

Get coverage for a new car replacement. This form of coverage allows you to replace a totaled new car with one of the same make, model, and equipment. If you opt-out of this coverage and only buy collision or comprehensive coverage, your insurance company will most likely only pay you the car’s real cash value or what it was worth when it was totaled.

Purchase a less expensive vehicle. Buying a less expensive car means borrowing less money, which could imply a smaller monthly payment.

To help you qualify for a loan, get a co-signer. When a co-signer with good credit agrees to share loan repayment obligation, the lender’s risk is reduced, and he gets a better chance of approving a loan with a lower interest rate. 

Final Thoughts

In the end, the amount of down payment you can afford will determine your option. Check out a car loan calculator, entering different down payment amounts and adjusting up or down based on how much you can afford to put down to see how your down payment will affect your monthly payments.

Putting as much money down as possible on a car, on the other hand, is the key to receiving the best interest rates and maintaining a positive equity position.

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