The prices of both used and new vehicles, nowadays, can be quite high. By applying for an auto loan, you can still buy a car, you just have to pay for it in monthly installments. The key to finding the right loan is determined by the amount of down payment you put on it.
Edmunds explains how important a down payment is and why you should pay close attention to its benefits. Let’s take a close look at what they had to say.
How the money you put down on an auto loan affects your monthly payment
According to the article, the best percentage to put down on a vehicle is around 20 percent of the price. However, over the last decade or so, people have only given 9 percent to 11.7 percent instead, because that’s what they typically can afford.
Your trade-in vehicle can also act as a down payment. But you would need to get a good price for it in order for it to be beneficial. Or, you would need to add another decent sum of money to it to make a larger down payment on the loan.
The amount of loan you would end up paying back is the price after trade-in value, incentives, and any other down payment money they subtract from the total cost of the vehicle. That price is divided up into monthly payments depending on the amount of time you take to pay back the loan.
The average time period for most auto loans these days is around 69 months, which is almost six years. You could go seven years in some cases, but these will cost you much more in interest charges by the time you pay off the loan.
Why the bigger down payment is better
The more you can reasonably put down, the better off you’ll be. One area where it would help you the most is in the depreciation value of the vehicle. New cars, trucks, and SUVs can depreciate by 30.5 percent in the first year alone.
A larger down payment can offset the costs of the vehicle depreciation in the first year. Otherwise, you’ll have negative equity, which is where you owe more on the vehicle than it’s actually worth. This could cause you problems getting a loan in the future.
Another area where it could help is when a person gets into an accident, especially in the first couple of years of ownership, and the vehicle is considered totaled by the insurance agency. Typically, they would pay what it’s worth, but it might not be enough. That means you could end up still owing money on that vehicle.
It will also allow you to choose a shorter-term loan, which would lower the interest charges you would pay in that loan period. For used vehicles, a larger down payment could increase your chances of getting approved if your credit isn’t as good as they’d like it to be.
What you should keep in mind when deciding what vehicle you can afford
Gifting yourself a new car is a great way to lift your spirits, but you need to be careful not to overdo it. Some people take monthly payment amounts into consideration when choosing a vehicle to buy. The smaller amounts certainly seem more affordable, but you generally end up paying way more than the vehicle is worth by the time the loan is paid in full, which is usually in 5-6 years. Opt for smaller payments in shorter periods of time, like 3-4 years.
By putting more down, you can pay off the loan in a shorter amount of time and it will help you avoid overpaying for the car. It’s recommended to put down at least 20 percent of the price, but not everyone can afford that. With vehicle prices these days, that would amount to approximately $7,200.
To determine how much you can afford for a vehicle, crunch the numbers and see how much money you can feasibly put down on the vehicle on top of your trade-in value. For every $1,000 you put down on a car, the monthly payment would go down about $15-$18.
Don’t be fooled by 0 percent down offers or low monthly payments stretched out over a long period of time. Be sure to put down as much as you can without sending yourself into bankruptcy, so that you can pay off the loan as quickly as possible.