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All about Down Payments

Down payments are an important part of financing a new auto. Here is a guide on how to determine how large of a down payment you need to finance a new auto.

Down Payments

Everyone knows the harsh reality of new-car depreciation—the car loses substantial value the moment you drive it off the lot.  This is where the down payment comes in.  A down payment is the amount of cash you provide up-front when you finance a new auto.  A down payment indicates to a lender that you are committed to the deal and willing to make an investment in it.  You can also demonstrate your willingness to gain a more favorable interest rate with a sizeable down payment.  Moreover, a down payment also functions as a buffer against the instant depreciation of new cars so you don’t end up “upside down” when you finance a new auto. 

What Upside Down Means

If you finance a new auto and are “upside down” in the loan, it means that you owe more on your car than it is worth.  Almost all new car transactions, and many used car deals, involve some period where the borrower is upside down in the loan.  You can almost count on being upside down for a least a short period of time when you finance a new auto. For example, even if you follow expert advice and put 20% down on your car only to have it depreciate 25% in the first few months, you will be upside down in the loan for that time.  Being upside down only becomes a problem if you remain that way three or four years after you finance a new auto.  Some borrowers exacerbate this situation by purchasing a new car before they’ve paid off their old one and rolling the old debt into the new loan.  This only puts them upside down all over again with the new loan because of the additional debt. 

Benefits of a Sizeable Down Payment

If you make a sizeable down payment when you finance a new auto, you will benefit greatly.  The recommendation is a down payment 20%, though the average car buyer puts down only 5%.  Here are some of the benefits of a larger down payment:

  • Build equity in your car faster
  • Protect against rapid depreciation
  • Enjoy better terms and rates
  • Avoid having to purchase credit insurance
  • Pay your car loan off faster

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Be the to know

  • Watch for hidden penalties when you finance a new auto.
  • Some lenders require credit insurance before they will finance a new auto.
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