What Kind of Down Payment Do I Need?
What Kind of Down Payment Do I Need to Finance a Car?
Buying a new car is a big deal in most American households. After buying a house, it’s the next biggest financial commitment you will make in your lifetime. Once you’ve decided on your favorite set of wheels, it’s time to ask the important question: how much down payment do you need to finance the car?
Understanding Your Down Payment
Everyone has a different idea about what’s the right figure. While some argue that it’s best to pay as much as you can so that your monthly payments are lower, many others say that you should conserve your cash and pay it slowly over four to five years. The right answer is based on your individual cash situation, the cost of your car, your credit score and many other factors. We bring you some strategies to help you decide on your down payment amount.
The 20% Rule
When it comes to a down payment, bigger is indeed better. That’s why setting aside at least 20% of your car’s price is considered wise when you want to opt for auto financing. There are many benefits of doing so. First, when you put down 20 percent of the amount, you’re likely to get much better rates. Also, your monthly payments will be lower and you’ll be less likely to be upside down on your loan, which means you won’t owe more than what your car is worth.
What About 10%?
Though 20% is recommended by experts, most average buyers can’t afford to put down so much for their car. In such cases, many car buyers tend to spend 10% of the car’s price as the down payment. This is also a significant amount and you can still enjoy some benefits listed above. Also, 10% is a good figure to pay as a down payment for a used car, which many buyers are now considering as a financially smart option. Buying a quality, dependable used car with no bad history and low mileage can actually be a great choice. Since the used car has already depreciated in value, lenders tend to require a smaller down payment.
Zero Down Payment
For those who want to keep all their cash, there is also an option of zero down payment that’s becoming increasingly popular in most dealerships. However, it is important to note that only a few people can qualify for a zero down payment as you need to have an excellent credit rating. Plus, your monthly payments will be much higher in such cases. It is also a good idea to get short-term insurance so that you can cover your car in the first few years and avoid getting upside down if there is an accident or your car’s value goes down below what you owe.
Ideally, there is no perfect figure for a down payment. The 20% rule is a goal that you should keep in mind when car shopping. However, it should be a number that you can personally afford without hurting your finances.
