My last work life integration blog post discussed how I bought a Tesla in under 5 minutes. I can't afford to pay for it all in cash so I started looking at different local credit unions to get an auto loan. With interest rates at all-time lows, it makes sense to take out an auto loan instead of paying for it in case. I landed on one because of a crazy low interest rate of 1.99% over 75 months. That is the lowest I've seen - feel free to shoot me a note if you'd like a referral. One of the biggest questions I hear when taking out an auto loan is whether or not your should make a down payment. You'll see a lot of TV ads claiming "zero down", but those offers are usually reserved for people with A+ Credit and it still could result in higher interest rates. There are many factors, but here are 5 reasons to make a down payment:
You may get approved for a loan more easily. Especially if your credit score is low, a down payment may help you qualify for an auto loan. Without the downpayment, your lender has more to lose if you don't repay the loan and they need to take the car back.
You pay less interest
It's easy math. The more money you put down initially, the less money you need to borrow for your new car. With a smaller loan you'll pay interest on a smaller balance, so overall your total interest will be less with more money down.
Your monthly payment will go down
Just like with the benefit above, putting money down will decrease that actual amount of money you are borrowing. In addition to paying less interest over the course of the loan, your monthly payments will go down as well. The more money down, the less your monthly payment will be.
Closer to owning your car
The more money you put down, the closer you are to owning your car outright. Remember, when you take out a loan that financial institution owns it until you pay it off. Your monthly payments will start with a heavy percentage going to interest, and a smaller amount going to principal, but over time that will flip. For every dollar you put down initially, that goes straight to equity in the car.
You can offset initial depreciation
Your vehicle will lose value the second you drive it off the lot. With the exception of the Tesla Model 3 right now because of how in-demand it is. I actually saw ads for people selling their car for OVER the retail price because of the long wait times. Many cars will lose 25% or more of their value in the first year! If you don't make a downpayment and need to sell the car because of financial troubles, you could end up owing more than what you can sell it for. The downpayment can help ease this burden.
There is not a specific number or percentage that you should put down. Because your car will lose value and depreciate quickly a good rule of thumb is to put down 20% or more to avoid being "upside down". Although, the average downpayment is closer to 12%. Also, if you are trading in your car or selling your old car, put all that money right towards the down payment. Bottom line, put down what you can afford. The bigger the downpayment, the lower the monthly payment, the closer you are to owning the car, and you will pay less interest over the life of the auto loan.
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