Establishing Your Vehicle Financing Down Payment
You have reached the late stages of your car buying adventure. You have conducted all your research, performed the necessary test drives, and completed the applicable inspections on the vehicle you wish to call your own. Agreeing upon a price for your new or pre-owned automobile, the time has come to pay for that vehicle.
Entry-level new vehicle prices in the United States start at around $20,000, so it may be quite challenging to cover the entire cost of a car outright. Even for a used vehicle, the financial undertaking can be substantial. Realizing the availability of funds can be an obstacle to car buying.
Automobile financing has become a widely exploited method to afford a vehicle by making structured payments over a period of time. The amount of the down payment and length of the repayment period plays a paramount role in your personal money management and can affect the way your car payments will precede.
Before the Down Payment
If you are buying your vehicle using a car loan, it is time to choose the right financial agreement. With a down payment in mind, you should consider your lifestyle when choosing the form of automobile financing you want to pursue.
How long are you willing to pay-off the price for your vehicle? Familiar loan terms have ranged between 12 and 60 months but longer repayment periods have begun to pop up. Several car dealerships have started offering finance terms extending up to 84 months and even longer. For individuals who acquire a new vehicle every three to five years, beware, longer duration finance will confine a buyer with money owing on a vehicle that has depreciated.
Another ingredient to a car loan is the interest. Depending on a buyer’s credit being in good standing, interest rates are generally low. However, some buyers will encounter negotiations where that prime interest rate simply is not available. Short-term loans allow the buyer to pay off the vehicle and minimize the amount of applicable interest. With a longer finance term, monthly payments may be lower but could be accompanied by higher interest rates resulting in a buyer paying significantly above the vehicle’s value over the loan period in finance charges.
Financing with 0% Down Payment
You have probably seen the television commercial or have spotted big stickers in the windows of some car dealerships advertising no money down or zero percent down payments. Perhaps one of those advertisements for zero percent financing has served as the motive to acquire a newer car, truck or crossover.
The plus side of a zero percent down payment is the minimal financial barriers between entering the dealership and driving off the lot with the vehicle you want. Without having to save money for a down payment, zero percent financing is enticing for consumers who struggle in maintaining a large amount of savings.
One difficulty with zero percent down is the buyer‘s financial pressure tends to be dissipated over a longer term. Since the value of a car or truck depreciate once they leave the dealership lot, the agreed upon financing quickly exceeds the actual value of the vehicle, resulting in what is called being “upside down.” When a loan is upside down, a situation where the vehicle becomes totaled in the short term could prove financially devastating. An insurance company would cover only the vehicle value and the buyer having to pay back the remainder of the loan amount. A down payment would often work to combat the financial hit resulting from an upside down car loan.
Another obstacle to zero percent down payment financing is these plans may not be available to certain buyers with less than ideal credit.
Financing with 10% Down Payment
Compared to financing without a down payment, 10% down immediately reduces the owed amount on your vehicle purchase. A down payment also reduces the size of the monthly payment causing less of a financial drain over the loan term.
Providing more protection than a zero percent down payment, there is still a likely chance of going upside down with a 10% down payment car loan for a new vehicle. Interest and vehicle depreciation early in the repayment of car financing could amount in an owed amount exceeding the car’s value.
An advantage with a 10% down payment could prove most effect with pre-owned cars. Pre-owned or used purchases where the vehicle depreciation amount is not as great as with newer vehicles. However, since interest rates for pre-owned cars could be higher than new vehicles, there may be another culprit for the amount owed to exceed the car’s value.
Financing with 20% Down Payment
For a long time, purchasing a vehicle with a 20% down payment has been the most advised method of financing. The reason for justifying the 20% down payment is based on the first-year depreciation of new cars. This down payment will reduce the chance of a car loan turning upside down. By paying what equates to one-fifth of a vehicle’s value upfront, a lower owed principal on the vehicle will result in lower monthly rates and will minimize the accumulation of interest.
While placing a higher down payment is viewed as the wisest financial plan in the end, the action does present some short-term pitfalls. For a $20,000 vehicle, a down payment of $4,000 may not be easily afforded.
Working well for new cars, a larger down payment may not be the best choice when it comes to pre-owned vehicles. Since older vehicles tend not to depreciate at the same rate as a newer car, the risk of a loan going upside down is reduced. For this scenario, a 20% down payment may not be appropriate for those who have less cash on hand.
By choosing the right down payment and financing plan, you will guarantee yourself a swift path to vehicle ownership.