How Much of a Down Payment Do I Need for an Auto Loan?
Whether you are shopping for a new or used vehicle, your auto loan down payment can help make the right vehicle affordable. How much you should put down depends on a few variables, including how much you can afford to pay each month. Generally, the larger your down payment, the lower your monthly payments. Keep in mind, however, that your down payment should not drain your savings.Each buyer will have to look at their individual finances to determine how much they can afford and what they are willing to put down. Though this varies from buyer to buyer, there are a few things to consider when calculating your down payment. Do lenders require a minimum? How much does the down payment affect your auto loan rates? We’ll answer these questions and more to help you determine the size of your auto loan down payment.
What Is the Average Down Payment?
In contrast to home loans, borrowers typically put less down on vehicle loans. Since there is usually no minimum amount required for an auto loan, borrowers are not obligated to put 20 percent down to qualify for a loan. And with rising prices, not everyone can afford to put 20 percent down. If a car costs on average $48,000, a 20 percent down payment would cost $9,600. For this reason, buyers tend to put 10 to 12 percent down. On average, most buyers put down 11.7 percent for their down payment.
When calculating your down payment, it’s important to analyze your finances and set a clear budget. How much money can you put down without draining your savings? How much can you comfortably afford each month in payments? If putting more down means taking out money from your emergency fund, consider only putting down what you can afford.
Qualify for Better Rates
If you can afford to put 20 percent down for your auto loan down payment, you may qualify for lower interest rates. As a general rule, the larger the down payment the better the rates. Larger down payments communicate to the lender that you are a low-risk borrower and can afford to make timely payments on the loan. Conversely, borrowers who put little to no down are considered higher risk, and therefore lenders charge more in interest to protect themselves from borrowers who may default on a loan. To unlock the best rates, consider putting 20 percent down for a new car or 10 percent down for a used car.Larger down payments also mean you are borrowing less. With a smaller loan, you may opt for a shorter loan term and pay off the loan sooner. Shorter loan terms mean you pay less interest over the life of the loan. When you put more down, you save money and keep what is yours.
Lower Your Monthly Payments
The more you put down, the lower your monthly payments as well. Financing a smaller principal and paying less interest reduces how much you owe each month. If you’d prefer smaller payments, consider putting as much as 20 or even 25 percent down. This option is ideal for buyers who have a lot in savings and are looking to pay off their auto loan quickly. It’s also ideal for buyers who are looking to keep their monthly payments low so they can continue to finance other ventures and have more money left over each month to save or invest.However, this approach only works if you have expendable money in your savings. Only put down what you can comfortably afford, even if it’s only 10 to 15 percent down. Keep in mind, this will raise your monthly payments. You can use an auto loan calculator to see how different down payment amounts affect your monthly payments. This will help you determine what works best for your budget.
Avoid Upside Down Loans
Putting more down for your auto loan down payment will also help offset the initial depreciation of your vehicle. As soon as you drive off the lot, your new vehicle begins to depreciate and continues to do so throughout its life. If you put very little down on your auto loan, you may end up with negative equity and owe more than its worth. This is sometimes called being upside down on your loan.To avoid being upside down on your auto loan, consider investing more up front. This will help mitigate the costs of depreciation so you don’t owe the difference when it comes time to sell. It also acts as a safeguard in case of an accident. If your car is deemed a total loss, you want the insurance payment to cover what you owe.
Choose the Right Lender for Added Savings
In addition to calculating your down payment, it’s also important to borrow through the right lender. Lenders offer different loan programs with varying rates and loan terms. Shop around for a lender with the best rates and terms. Look at interest rates, the length of the loan terms, as well as any fees or penalties. Not all lenders are created equal. For instance, for better rates, think about joining a credit union. Credit unions are not-for-profit and owned by their members rather than investors. They do not need to turn a profit for their investors. For this reason, credit unions can offer lower interest rates on loans, lower fees, higher savings rates, and more personalized service.If you are not already a member of a credit union, joining is easy. With Capital Credit Union, you’re set to win. Anyone who lives, works, attends school in, owns property in, or owns/runs a business in northeast Wisconsin qualifies. Join today for low rates, low monthly payments, and expert guidance. We can even help you find the right dealer. Whether new or used, we’ll get you in a vehicle that’s best for your lifestyle.
