What Kind of Down Payment Do I Need to Finance a Car?

What Kind of Down Payment Do I Need to Finance a Car?

Everyone who is looking to buy a new car thinks about what’s the right down payment to ensure an affordable loan. Although there’s no one-size-fits-all answer, many experts will tell you to put down around 20%. However, different situations demand different solutions and thus, we bring you the steps to help you determine the right kind of down payment for your next car.

Get Your Credit Report

The first step when considering a loan is to apply for a credit score. You can get a credit score free from the federal government. Make sure that all the information in the report is correct and remove any misinformation from your report to avoid financial hassles in the future. Normally, most credit scores are in the range of 300 to 850 and the higher your score, the better. When you have a higher score, you can qualify for the best interest rates. On the contrary, lower scores mean fewer loan options.

Choosing Between a Used and a New Car

You need to consider your requirements and finalize what kind of car works best for you. Though new cars come with a set of advantages, they tend to also depreciate faster than used cars. New cars can depreciate 20% the minute you drive it off the lot. However, if you pay off your car loan in three years and keep the car for 10 years, you’ll have 7 years of loan-free ownership along with a few years of warranty too! If you’re buying a used car, you don’t have to worry so much about depreciation. Remember that new cars aren’t cheap. As per research, new car loans cost nearly $30,329 while used car loans cost about $19,291.

Figuring Out Your Down Payment

Once you have some basic information, you are ready to determine the right amount of down payment for your car. Consider the following:

Is Your Credit Bad?

If your credit score isn’t great, you’ll have to adjust to loan terms that aren’t ideal. In such cases, it’s best to increase your down payment as much as you can before you buy. If your credit score is good, you can find some really good loans with excellent terms.

Buying New?

If you’re buying a new car, you must put down at least 20% so that you’re not upside down on your loan. Even if you qualify for a loan with a lower APR, it doesn’t seem wise to owe more than your car’s value when you drive it off the lot.

Buying Used?

Older cars also depreciate, but at a much lower rate. However, it is still recommended to put down at least 10% so that you can start the loan with some equity.

The Last Word

Remember that the bigger your down payment, the smaller your loan. This will improve your monthly cash flow and help you save more on interest. If you find an interest rate above 7%, you should save as much as you can for a bigger down payment and wait until you absolutely must buy a car.

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