When you buy a car, you'll usually be expected to pay a down payment. It's often possible to make this payment quite low; in fact, many dealerships provide deals with no money down, especially if you have good credit.
However, it really makes better financial sense to pay a large down payment—this has traditionally been set at around 20% of the total purchase price. Here are just five reasons why this is a good idea.
1. Immediate Equity
The more money you put down right away, the more equity you have in the vehicle. Car values depreciate sharply over the first year or two. If you pay very little and add in the sales tax, registration fees, and other costs, you might find yourself owing more on the vehicle than the vehicle is actually worth. If your car is written off after an accident, you could end up having to pay back more than the insurance company will provide for a car you're not even able to drive anymore.
2. Lower Loan Size
Putting down more money upfront lowers the size of your loan, and that gives you better financial flexibility in the future. If you need to make another purchase on credit, you won't have to worry as much about the debt you're building up. Additionally, lenders may be more willing to lend you money if you don't have a large amount of debt outstanding.
3. Better Interest Rates
Every car financing deal is going to have interest payments, but you can cut those interest payments significantly by making a large down payment—this means you'll end up saving over the course of the loan, and it's particularly beneficial for buyers with poor credit who would otherwise have found it hard to qualify for the best interest rates.
4. Lower Monthly Payments
A large down payment pays off a huge chunk of your car's value right away, which means your monthly payments will be lower going forward. You won't have to control your cash flow as strictly each month, and you'll be better able to cope with any unexpected costs or changes in your income.
5. Shorter Terms
A large down payment often makes it possible to reduce the term of your loan. Instead of making monthly payments for five years, you could be in a position to make the car completely yours in just three years. That saves on interest charges, avoids negative equity, and means you'll be able to trade up for a newer model faster, if you so choose.