What Should I Know About Down Payments?
Why Make a Down Payment?
Putting money down when buying or leasing a car serves several different functions. Down payments can lower your monthly payment, lower the interest rate, or can shorten the loan term if you choose to keep the payments the same. The amount of cash that you should plan on putting down for your next car will depend on a few factors like the car’s price, year, and if you are buying the car or leasing it.
How Much Should You Put Down?
When buying a used car, you generally want to put down 10% or more of the vehicle’s sale price. This means buyers who want to finance the purchase of a $12,000 used vehicle should plan to put at least $1,200 down. Lenders may want you to put more money down on a new car to offset the new car’s quicker depreciation. Usually an initial payment of 20% or more of the purchase price is a good rule to follow when buying new. This works out to $7,000 down on a $35,000 vehicle, resulting in a financed amount of $28,000. Keep in mind that the more money you put down when financing a vehicle, the lower your loan amount will be. Though saving up for a 20% down payment can be difficult, a large down payment will actually save you money in the long run by allowing you to choose a shorter finance term with less interest charges.
When it comes to leasing a car, the required initial payment, or cash due at signing, is usually predetermined by the dealership. Instead of following the usual loan strategy and paying as much down as possible, you should stick with the minimum amount of cash due at signing. If you pay more than the minimum up front, you’ll risk spending more money than necessary.
What Can You Use For A Down Payment?
A down payment doesn’t necessarily mean you need all the money in cash. Some common ways to come up with a down payment are with a trade-in vehicle or with a cash rebate on the vehicle’s purchase. If a dealer takes your trade-in, the trade-in value is deducted directly from the purchase price of your new vehicle. You can use your trade-in value as the down payment for both new and used car loans as well as new car leases. Sometimes dealers and manufacturers will offer rebates on new vehicles, too. If that’s the case for your new car, those rebate amounts will also be subtracted from the purchase price.