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What Is a Down Payment? How Does It Affect Your Car Loan?

  • Auto Refinance
  • Nova Kainen
  • 7 minutes

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When you’re dreaming about a new car, you’ll start putting money aside for it. When your savings fall short of your goal, what plan do you have? You can use the money you’ve set up for a car down payment if you decide to finance your purchase. Find out more about the down payment on a car and how it is useful for a car purchase.    

down payment on a car

What is a down payment on a car?

A down payment on a car is the initial payment that you make during the purchase of your car. If you are buying a car worth $30000, an initial payment of $3000 makes it a 10% down payment. Once you make a down payment, the loan terms become more favorable for you.   

How do down payments work?

Down payments are one of those factors which can affect your loan rate and monthly payments. If you are ready to make a sizable down payment, lenders will have more trust in you and will easily sanction auto loans.  

Easily manage your auto loan payments using Way.com, your auto super app, and also enjoy the best refinancing options.

What is the suggested amount for a car down payment?

According to the statistics, the average down payment on a new car loan was found to be below 12%. But it is recommended that if you make a 20% down payment, there are greater chances for you to get an auto loan even if you have a poor credit score.  

The rising cost of vehicles, relative to relatively stagnant wage growth, makes it difficult for most people to save enough for a large down payment before buying a car. 

It is unlikely that you will be on an upside-down loan, where you owe more for the automobile than it is worth if you put 20% down and then have to sell the car within the first year. The depreciation can be paid upfront, which may help you get a better interest rate from your lender. 

Used car loans typically have a lower down payment requirement. Typically, ten percent of the car’s worth is all that’s required. Due to depreciation, the value of a used car is significantly lower than it was when it was new. 

More First-Time Car Buyer: How Much Should You Spend?

How do I calculate a down payment?

Generally, a 20% down payment is expected to be paid to make loans more affordable for you in the long run. If the purchase price of your car is $40000, then a 20% down payment is the same as $8000, a 10% down payment is equivalent to $4000 and a 5% down payment same as $2000.  

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If you know the purchase price of the car and the percentage you want to put down, you can quickly figure out how much you need to save for a down payment. 

Get ready to save up to $1850 every year on your refinanced auto loan and up to $3000 a year on car expenses.

Do credit scores affect down payments?

Lenders consider many aspects when deciding whether or not to provide you with a loan, and a significant one of those is your credit score. There is no definite correlation between your credit rating and your capacity to make a down payment, but it could affect your loan.  

Making a larger down payment will help you qualify for a loan even if your credit is less than perfect. Prepayment helps reduce the total loan amount and increases your likelihood of approval. 

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Why is it a good idea to make a down payment?

You might be doubting whether a down payment is important even when the lender does not demand it. Here are the different benefits of making a down payment and you will get a better idea of why it makes sense to make a down payment.   

Boost your chances of getting approved for a loan

A down payment can be useful especially when you have a poor credit score. Lenders will be more confident to approve your loan by making a large down payment.   

Lower your monthly payments

If you buy a car worth $40000 and you make a down payment of $5000, then the interest rate will be calculated on the remaining amount i.e., on $35000. The monthly payments will thus get reduced. By making a sizable down payment, you can lower your monthly payment.    

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Decrease your interest rates

You can reduce the amount you have to borrow to pay for a car by increasing the down payment. The interest you pay on a smaller loan amount will be less than on a larger one.  

Lower your loan-to-value ratio (LTV)

The value of your vehicle will determine how much you can borrow from a lender. For loans that don’t quite meet the LTV ratio, a larger down payment can bring them back into the acceptable range.  

Depreciation can be offset

The annual depreciation rate for vehicles is roughly 15%, with a higher rate for brand-new vehicles. They can lose 25% of their value or more within the first year.   

When you drive off the lot with your new automobile, if you didn’t put down a sizable down payment, you can find yourself on an upside-down loan. 

What does it mean by Loan to Value ratio?

For a lender, determining what interest rate is fair for a particular borrower comes down to assessing the level of risk associated with lending the loan. LTV is one metric that some lenders use in making this determination. The Loan-to-Value (LTV) ratio is determined by taking the total loan amount and dividing it by the total vehicle value.  

If the ratio is high, the lender is taking on greater risk by providing the loan. Some lenders will protect themselves from potential losses by charging you a higher interest rate. 

What are the various tips to save for a down payment?

It is always advisable to save some money ahead of time before going to purchase your car. If you find it difficult to set aside some money, here are some tips for you. 

  • Do proper research and get an idea in advance about the purchase price of your car.  
  • Create a budget and find out how much you can save every month as part of the down payment. 
  • Improve your credit score by making on-time payments and paying off any outstanding debt. 
  • Trade in your current vehicle and use the amount as part of your down payment. 
  • Use apps or tools which can help you in your saving process.  

Bottom line

If you have less-than-perfect credit, making a down payment on a car can help you save money and improve your chances of securing a loan. 

Don’t rush and look for a car loan without first saving for a down payment if you can help it. Make a plan for how much you can save each month and how much of a down payment you can afford on a car by creating a budget. At that point, you’ll be able to go out and find the ideal vehicle for your needs.  

down payment on a car

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