“No money down!” These words are nearly impossible to ignore when you're shopping for a car. What could be sweeter than not making a down payment? Believe it or not, paying 20% upfront.
Here are a few good reasons to put down 20% on a car:
You might receive a lower interest rate
Making a sizable down payment means you're borrowing less. It also signals to lenders that you're a saver and probably a lower risk as a borrower. That means lenders are more likely to offer you a lower interest rate.
You can counterbalance a low credit score
If your score is below, say, 670, you might have a hard time getting financing. But a down payment of 15% or more can help bolster your credentials if you're looking for a loan at a credit union or a bank, according to car-buying website Edmunds.com.
You'll qualify for lower monthly payments
Putting more down upfront means paying less every month after, not to mention paying less in interest over the life of the loan.
You'll build equity
The value of a new car decreases in a hurry — typically 20% within the first year. In other words, if you put nothing down, you owe more than the vehicle is worth the instant you drive it off the lot. This is called being “upside down” on your loan.
Being upside down can have real consequences. For example, if your vehicle is totaled, the insurance company will only pay its value before the crash. Your loan balance won't figure in its calculations. Then you'll need to make payments on a car you no longer have.
A big down payment negates the first year of depreciation, which is even more important now that 72-month loans are becoming more common. Since the average car owner keeps a new vehicle for about 78 months, building equity early minimizes the likelihood you'll be shopping for a replacement while you still owe more on your current car than it's worth in the marketplace.
Of course, coming up with several thousand dollars for a down payment isn't always easy. A trade-in and some savings may be able to get the job done. And if 20% isn't feasible, make the largest down payment you can afford, whether it's 15% or 10% — which is actually closer to the national average. Remember that every dollar you pay upfront cuts your monthly payment and saves you on interest.
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