You’ve probably seen and heard countless offers for new cars with zero down payment. While the prospect of buying a car without paying a bunch of money upfront sounds tempting, you shouldn’t rule out a down payment just yet. Whether you decide to pay in cold, hard cash or use your old car as a trade-in towards your new car, a solid down payment can help benefit you when it comes time to secure financing for another vehicle.
A Down Payment Makes It Easier to Qualify for Loans For car buyers with a less-than-stellar credit history, a down payment can mean the difference between securing an auto loan and missing out on buying a new car. Making a down payment can show lenders just how serious you are about not only buying a new vehicle, but keeping up with the monthly payments. If your credit score falls into the subprime category, making a larger-than-usual down payment can help make it easier to qualify for the loan you need for your next new ride.
Bigger Down Payments Equal Lower Monthly Payments Putting money down upfront on your next vehicle also reduces the amount of money you’ll need to borrow. The larger the down payment, the less money you’ll need for your loan and, in turn, the lower your monthly payments. A large down payment can work in your favor if your auto loan has a higher-than-normal interest rate.
Let’s say for example you purchase a car with no money down and borrow $35,000 at a 3.11-percent interest rate for a 60-month term. Without a down payment, your monthly payments would total around $631 before taxes. With a 15-percent or $5,250 down payment, however, you’d only need to borrow $29,750 and end up paying $536 at the same interest rate for the same period.
A Down Payment Helps Reduce Interest Speaking of interest, making a down payment can also help reduce the amount of interest you’ll pay over the life of the auto loan. Let’s look back at the example mentioned above. At the 3.11-percent interest rate mentioned earlier, that $35,000 loan will cost you an extra $2,837 in interest payments over the life of the loan.
A 15-percent down payment not only reduces your loan amount, but it’ll also bring your total interest payments down to $2,411 – a $426 savings over the life of the loan. It’s easy to see how down payments can help you save money on interest payments, especially if you have a higher-interest auto loan.
Down Payments Help Offset Depreciation Depreciation could be a killer for new car buyers, especially for those who choose to finance instead of leasing their vehicles. A typical new vehicle loses a quarter of its value instantly once it leaves the dealership and goes on to lose 15 to 20 percent of its value after the first year of ownership. For anyone with a subprime auto loan, depreciation serves as a painful prospect that even land you upside down – owing more money on your vehicle than its actual worth – on your loan.
A substantial down payment can help make it easier to manage one of the biggest depreciating assets you’ll buy during your lifetime. A large down payment helps close the gap between the remaining amount on your loan and your vehicle’s current value, which in turn reduces the likelihood of your vehicle having negative equity.
You’ll Qualify for Special Financing Programs A down payment does more than make you a more attractive customer to auto lenders. You’ll also be able to qualify for special rates and loan terms that you’d otherwise miss out on without a down payment. Your auto lender may offer you a lower interest rate, a more generous loan term or some other type of special incentive in exchange for making a larger down payment on your next new vehicle.
When exploring these special incentives, don’t forget to check the fine print carefully before signing on the dotted line. After all, dealers and lenders are required to disclose the specifics of these terms in their documentation. Don’t hesitate to ask questions, especially when it comes to the down payment requirements.