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How Much Should You Put As Down Payment on a Car?

At the end of the day, the amount you put as a down payment on a car largely depends on you. But there are a few things to consider if you’re opting for brand new or a second-hand vehicle. Although a down payment helps to reduce the overall cost of a car, not all lenders request a down payment. There are “no money down” offers you can find that will help you save money.

If it’s a second-hand vehicle, your first step should be to get a used car down payment calculator. It will go a long way to help you decide on how much you can put as a down payment. However, before you go ahead to crunch the numbers, there are a few things you need to know going forward.

Why put a Down Payment?

There are lots of reasons why a down payment is the right decision when buying a car. Some of the reasons include:

  • The lender will offer you better terms on your loan application, including lower rates.
  • Your chances of getting approval increases with a down payment.
  • You’ll have lesser to pay monthly plus less money to spend throughout the loan term.
  • You’ll gain more equity in your car and a better feeling of ownership.
  • Your chances of accruing negative equity decrease with a down payment.

When you want to put down money for a car, you need to consider the upsides. For instance, if you’re purchasing a C$40,000 car and you put down C$10,000, your monthly rates will be lower than if you decide to finance the whole cost. And if you’re an individual without a fixed monthly income, or who finds it difficult to stay within the confines of a budget, putting a down payment is better for you.

Lower Interest Rate

A large chunk in down payment shows the lender you’re invested in the vehicle and thus present a lower risk. Because of this, lenders will offer you a better interest rate.

Higher Chance of Loan Approval

If your credit score is nothing to write home about, then a substantial down payment can help you over the line in your loan application. At this point, it’s necessary to know you don’t have to put all your down payment in cash. Two popular ways to shore up your down payment is with a cash rebate on the proposed vehicle or a trade-in.

Lower monthly payments

Following the very first point, putting down more cash means paying less interest over the loan term. And this translates into paying less monthly.

Delays Depreciation

It is ordinary knowledge cars lose value quickly. Once you purchase a new vehicle, it begins to depreciate the moment you drive it out of the lot. The rapid depreciation creates a gap in your insurance. If you put nothing down, you’d owe more than the car’s value without even driving it. That’s because the cost will include the price of the vehicle, sales tax, incidental fees, and interest. If you get into an accident, and you total the car, your insurance may not be able to cover the total cost of your debt.

What to put as Down Payment

Remember that situations differ among buyers. If you have a bad credit score, it’s better to put down more cash. However, the rule of thumb is to put at least 10% down if you’re buying a second-hand vehicle. For brand new cars, the idea is to put down 20% or more if you’re capable.

For a leased vehicle, there may not be enough wriggle room. Most car leases will specify how much you need to put down. And because you’ll never get this money back or own the vehicle, it’s not in your interest to put more than the specified amount.

Before you go to the dealer, have a look into your finances to know how much you can afford as the down payment. By now, you ought to have checked your credit to anticipate the type of interest rates you’ll receive. Taking care of these checklists will give you the ammunition you need to negotiate with your dealer.

Alternatives to Down Payment

As earlier mentioned, trading your current car for a new one is an excellent alternative to fronting cash as your down payment. This method is especially useful if your current vehicle still has value. Another option is the cash rebate. Once your dealer offers a discount, it is deducted from the purchase price of the car.

Final Thoughts

There’s no clear cut answer on how much you should put down on a vehicle. In a perfect world, you should pay cash. That way, you won’t burden your finances with the debt of financing a car.

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