5 Benefits of Making a Down Payment on a Car

Most car buyers spend their energy finding the perfect car but not the best auto loan deal. However, car financing is just as critical as finding your next high-performance, fully-featured automobile. Down payments are one of the best ways you can finance a car and help yourself save money on an auto loan. This can be paid in cash, by trading in your used car, or a combination of both.

Lenders usually want you to make a down payment to show your commitment to paying back the loan and get some compensation for the vehicle upfront. The general rule is to aim no less than 20% down, particularly for a new car, and not less than 10% for a used car. This will help ensure you don't end up paying too much interest and financing costs.

Making a large down payment have plenty of benefits, especially from a long-term point of view. Here are some of the top benefits of putting a large amount of money into a car.

1. Reduce negative equity

Your car's value reduces as soon as you drive it off the dealership, and it can lose 15-20% of its value after the first year of ownership. As the value of your car reduces, you could end up owing more on your loan than the vehicle is worth, a situation known as negative equity. However, making a large down payment on your auto loan can help build equity, and you may be able to reduce or even avoid the number of months of negative equity.

2. Save you money on interest

Making a down payment can help reduce the amount of interest you will pay over the life of your auto loan. For instance, if you borrow $30,000 at a 5% interest rate over 48 months, you will pay $3,162 in interest. However, with a $6,000 down payment, you will only pay $2,530 over the life of the auto loan. This is a significant benefit for buyers with bad credit scores who can't qualify for low-interest rates. Your actual interest rate (ARP) might be higher depending on your unique and individual situation.

3. Help get approved with bad credit

Not putting a down payment may not break the deal if you have good or excellent credit. However, for buyers with bad credit history, a down payment can make the difference between getting an auto loan and missing out on purchasing a new car.

Although a large down payment doesn't amend a bad credit history, it can show lenders or dealers how committed you are to buying a new car and keeping up with monthly payments. Making a large down payment can help you make it easier to qualify for the loan you need for your next ride. The lender will take you as a less risky borrower, especially if you are a subprime or vehicle buyer with a credit score between 580 and 619.

4. Lower monthly payment

Making a down payment on your next car also reduces the amount of money you will need to borrow. The larger the down payment you make, the less money you will need for your loan, which means smaller monthly payments.

A huge down payment can be of great benefit if your car loan has an exorbitant interest rate. For instance, if you buy a car without a down payment and borrow $35,000 at a 3.11% interest rate for a 60-month term, your monthly payments would add up to around $631 before taxes. However, if you make a 15% or $5,250 down payment, you would only need to borrow $29 750 and end up paying $536 at the same interest rate for the same period.

5. Helps qualify for special financing programs

Besides making you more attractive to auto lenders, a down payment can make you qualify for special offers that you would otherwise miss out on without a down payment. Your lender may give you a more generous loan term, a lower interest rate, or some other special incentives in exchange for putting down a huge down payment on your next new car.

However, don't forget to check the fine print before signing the paperwork when exploring these special offers. Essentially, dealers and lenders are required to disclose the specific terms and conditions in their documentation. Do not hesitate to ask questions, particularly when it comes to down payments, to make sure you understand the requirements.

Summing it up

Putting money down on a vehicle can save you cash and boost your chances of acquiring an auto loan with better loan terms, especially when you have a bad credit score. If you don't want to purchase a vehicle right away, consider saving for a down payment before you begin shopping around for an auto loan.

Creating a budget could help you set money aside and determine how much you can put down on a car. Once your down payment is squared away, you can go out and look for your perfect ride.