Benefits of a Down Payment
There are several advantages to making a down payment. They include the following: • Reduction in the size of your car loan • Lower monthly car payment • Interest rate reduction • Reduction in negative equity instances • Possibility of a shorter car loan term • Improves your chances of approval with bad credit A larger down payment will decrease the amount of money to be financed. The more money you place down means the less amount of money you will need to borrow. Such a reduction in your car loan will allow you to save money on interest charges. No one wants to have a large car payment. Making a large down payment will lower your monthly payment. It makes sense that a smaller car loan means having a smaller car payment. And, a smaller car payment will have a favorable effect on your monthly budget. A down payment could help you secure a lower interest rate. If you have adverse credit, then this is a plus since those individuals with challenged credit typically are prone to being saddled with higher interest rates. New cars have a well-known reputation to depreciate immediately upon delivery. Depreciation can cause you to owe more on your car loan than the car is worth. This is known as negative equity. A down payment will help you to build equity in your car. Suppose you are only a few months into your car loan, and your car is stolen or wrecked. Since you do not have GAP insurance, then you are responsible for paying the difference between the amount of money you owe, and the amount the car is worth. However, the negative equity may be reduced by your down payment. Or, it may be eliminated if your down payment is large enough to cover all of the months of negative equity. A large down payment can shorten the term of your loan. Of course, you will save on interest charges with a shorter loan term. However, it should be noted that a shorter loan term tends not to be a feasible choice because it generally will result in a larger car payment. If you have bad credit, then a large down payment will increase your chances of approval. Because you are viewed as being a risk, lenders may look more favorably upon you since you have demonstrated your commitment to repaying the loan. Detriments of a Down Payment Everything has a downside, including down payments. The downsides include the following: • Depletion of savings • Lack of time • Interest rate Most people do not have a separate bank account dedicated specifically to purchasing a new car. It would be nice to be able to make a large down payment. But, the reality is that most people simply cannot afford to do so, unless they have been saving for this expense for a period of time. It would be wise not to use your entire savings as a down payment. Doing so defeats the purpose of your savings. Most people have an immediate need for a car. Therefore, they do not have the luxury of saving for one in advance. As previously mentioned, a large down payment could lower your interest rate. But, this likely will not happen if your credit rating is poor. In all likelihood, a large down payment will affect the long-term cost of the car by decreasing it, but it will not affect your interest rate.