Car Down Payment – How Much Should You Put Down On A Car Loan
Down payment on a car loan is perhaps the most vital part of the car loan negotiation process. So you go to the dealer and first question he ask is, “how much down payment can you make on the car?” Your answer to this question will determine the interest rate of the loan, amount of other fees added and the total cost of the loan.
An answer that is not completely thought out can cost you several thousands of dollars. So, you have the option of either leasing or buying your car, therefore you should have some knowledge of the rules that apply to both and the potential pitfalls and advantages. The conventional way of purchasing a car suggests that the car buyer should be willing to put a 20% down payment. With a down payment of 20% the buyer has essentially paid the first years depreciation of the vehicle from the onset.
This makes it highly unlikely for the buyer to be upside down on the car loan (when what is owed on a vehicle is more than the worth of the vehicle). Avoiding this upside situation is important for in the event the buyer wanted to trade in his vehicle he would end up having negative equity on the new loan, as the trade-in, in reality, will not be a down payment if he was in an upside down predicament. In such a situations, the buyer would have to pay for the price of the new car plus the remaining amount on the trade-in loan.
The 20% down payment gives the buyer the flexibility to trade-in or sell his car for a higher price than the remainder of the loan. In addition, a good down payment means that your debt-to-access ratio will be lower, and that will be better for your credit score.
Down Payment on Car Lease
In leasing, a down payment or what is referred to as a Cap Cost Reduction is not the advisable way to go. In fact, in leasing down payment should be treated differently than it is recommended in buying a car. Usually, a car buyer will pay as much as $3000 down with the intentions of lowering their monthly payments.
This is not a bad idea, but there is a pitfall to this. In the event the buyer gets into an accident which renders the vehicle “totaled” the down payment is non refundable. Gap and collision insurance will not make a difference. It is advisable, then, to put this money towards drive off costs, such as administrative fees, acquisition fees, security deposits etc, which will lower your monthly payments
To determine whether 20% deposit on buying a car or a zero down payment on leasing is the best choice for you get an expert opinion from edmunds.com There are advantages and disadvantages to both leasing and buying a car. In the final analysis the buyer has to determine which option is best based on his transportation needs and budget. The key is to save money regardless of the option the buyer chooses.
