When you make a major purchase, you will often be asked to contribute a down payment. That’s true when you buy a home, and it’s also true when you purchase a car. Fortunately, most dealers don’t have a hard and fast rule about how much of a down payment you have to put down. Many don’t even require a certain amount. They’ll just ask you what you’re able to pay.
Having a choice can be good, especially if you’re in a tough financial spot and really need a car. But, if it’s all possible, you should try to make a fairly sizable down payment. In fact, the higher your down payment, the better. Here, you’ll learn what size down payments are recommended, as well as some tips and tricks to save up for the expense.
Aim for 10 to 20%
While you might not be required to put down a certain amount, there is a general “rule of thumb” that most buyers go by. That rule is to provide 20% of the purchase price of a new car as a down payment. If you’re buying used, the standard goes down to only 10%. Depending on the value of your car and the state of your savings, that can be quite a bit of money. But, if you have it, it’s in your best interest to contribute at least this amount. That’s because there are some surprising benefits to submitting a large down payment.
Lower Interest Rates
One of the nicest potential benefits of a big down payment is that it could mean lower interest rates. Lenders base interest rates on many factors, including how much you’re attempting to borrow, your credit score, and how much of a risk you pose to them. Handing over a large down payment lowers your loan amount. It also shows, regardless of your credit, that you have money to spend. Those factors combined may help a lender to offer you much better terms and a lower interest rate, which means you could pay less for your car.
Increase Your Chances of Approval
Many borrowers think that, if they apply for a car loan, they’ll get it, no matter what. Unfortunately, though, that’s not always the case. While there are some finance companies that specialize in high-risk borrowers or borrowers with bad credit, there are also plenty of lenders who will turn down your application if it’s not up to their standards. That can be embarrassing. Plus, it may lead you to seek out less scrupulous lenders, which is never a wise idea.
Fortunately, a hefty down payment can increase your chances of getting approved for a loan, and a more desirable loan at that. So, if you have doubts about your ability to get approved, offer up as much of a down payment as you can to stack the odds in your favor.
Enjoy a Lower Regular Payment Amount
No one wants to be forced into a huge car payment each month. In fact, this can set you up for failure from the start and make it much harder to pay off your loan. Luckily, a larger down payment can mean a lower, more reasonable monthly payment amount. It reduces the total you are borrowing, which means you can pay less each month. If you’re aiming for a specific payment amount, talk with your lender or dealer about how much of a down payment you would need to achieve that payment amount. While paying a bigger down payment may pose a challenge at first, it should pay off in the long run.
If You Can Pay More, Do it!
Sometimes, people choose to buy a car because they’ve recently come into a large sum of money. Or, their overall financial situation might have improved. If this applies to you and you can afford to pay more than 10 or 20%, go for it. There is no rule that says you can’t pay more than the standard. In fact, most lenders will be quite pleased if you plan to pay more than average. And, of course, if you’re one of the lucky few who can pay for your vehicle outright, go ahead and do so. Then, you won’t have to worry about interest charges, payment plans, or anything else. You’ll just have a great new or new-to-you car to enjoy.
What If You Don’t Have a Down Payment?
If you don’t have a big sum of money you can use for a down payment just sitting around, don’t feel bad. Many car buyers have trouble coming up with their down payments. However, that doesn’t mean that you should go out and try to get a car without making a down payment or that you should make a very small one. Instead, you should still try to aim for at least a 10 or 20% down payment. It might just take a little scrimping and saving on your part.
Plan Ahead
Not everyone is lucky enough to get advance notice that they’ll need a new car. Sometimes, your current car breaks down and can’t be fixed, leaving you to scramble and find a new one. Other times, an unexpected accident can lead to the need for a new car. But, if you do have some kind of advance notice, such as your old car slowing down or not working as well, start saving as soon as you possibly can. The more time you give yourself to save, the better your chances of building a big down payment and enjoying the benefits that go along with it.
Make (And Stick To) A Budget
When you’re trying to save money, one of the best things to do is to make and stick to a budget. Sit down and look carefully at what you earn versus what you spend each month. Think about which expenses are absolute must-haves and which ones could be eliminated. Things like going out to eat or subscribing to multiple entertainment services are great examples of expenses you can temporarily cut from your budget. Work savings into your budget as well. If you can save 10 or 20% from each paycheck towards your down payment, chances are that you’ll be ready to buy a car before you know it.
Keep Your Eye on the Prize
Sticking to that great budget you’ve set isn’t always easy. That’s why many people find it helpful to keep their goal clearly in mind. Consider putting a picture of your dream car in your wallet or somewhere else where you’ll see it often. Use this photo or other visual as a reminder of what you’re working toward and why you’re saving. It can really help you through the tough times. Furthermore, if you know which specific car you want, you’ll have a better idea of how much of a down payment you should be saving for.
Go Ahead And Clip Some Coupons
Buying groceries with coupons might not seem like much fun. However, it can really help you save. Instead of throwing away those fliers full of coupons, cut out the ones for items you need. You can also browse the sales while you’re at it. Additionally, remember that groceries aren’t the only things that go on sale. You can often find discounts or discount codes for lots of other things you buy. So, keep your eyes peeled. And, speaking of sales, pay attention to car dealerships in your area. You never know when one might run a sale or promotion that can help you get your car at a lower price.
Consider Asking For Help
If you’re doing all you can to save but your progress is unbearably slow, you might want to consider asking for a little help. It’s not easy to ask, but you might have close friends or family members who would be willing to help you make a down payment on a car or even co-sign your loan. This can help a lot, particularly if they have better credit than you. Of course, for most people, this option is a last resort, but it’s something worth considering, especially if you’re having a rough time saving or need a car as soon as possible.
Alternatively, you could also take out a loan or open a credit card to help cover the down payment. But, if you do this, you’ll need to be prepared to pay both the loan or card and your car payment at the same time.
Buying a car is exciting, but it does involve financial responsibility. The first big responsibility is your down payment. Set yourself up to pay as much as you can afford, and you’ll also set yourself up for a successful car buying experience.