How A Down Payment Can Affect Your Car Loan Monthly Payments

Your car loan payments will largely be based on the principal loan you take out. The smaller the principal loan, the less you will have to pay off over time. This can allow you to take a shorter loan. It can also allow you to make lower monthly payments on a long loan so your car purchase is more affordable. Without a down payment, you will have to finance 100% of the purchase price of the vehicle, which is an option some dealers do not even allow. You should aim to pay at least 10% down on the value of the car and more if possible.

Value of a Trade In

Your down payment can come 100% from the value of the car you are trading in. When you trade in a car, you need to be aggressive in seeking the best price possible. At times this may mean selling your car to a used car dealer instead of to the dealer where you are purchasing your new car. In any case, you should look at the Kelly Blue Book (KBB) and National Auto Dealers Association (NADA) price listings. The KBB is a consumer pricing index that estimates the value of your car based on its purchase price minus factors such as mileage, wear or accidents. The NADA value determines the value of your car based on what similar models are selling for at dealer auctions. Car dealers often prefer to use the NADA value because it is a more accurate snapshot of the actual cash value of your car at the time. You can find this value online, or you can ask the dealer to show you the NADA value through their network.

Cash Down Payment

A cash down payment is another option to reduce the total principal of your loan and your monthly payments. Providing a cash down payment is essentially the same as trading in a vehicle, but it gives you slightly more control. You can directly subtract the cash payment from the total purchase price of the car without negotiating the value of the down payment as you would with a trade in. When you know you will be purchasing a car in the near future, saving money for a down payment will help ease your expense in financing. 

How a Down Payment Affects Your Interest Rate

Lenders may determine your ability to provide a large down payment makes you a more attractive borrower. This can reduce your interest rate and save you money over time. If you have a bad credit score, it is particularly important to provide a high down payment to give confidence to your lender. When you finance less and your interest rates are lower, your monthly payments will be very low as well. For example, if you are financing the purchase of a $30,000 car over 5 years with only 5% down, you will have to finance over $400 a month plus a higher interest rate. With even a 10% down payment, your expenses will come down to about $330 a month plus a lower interest rate. This means about $150 a month difference by putting down the larger down payment. 

 


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