The Importance of Making a Down Payment When Buying a Car

Many people make a down payment when they buy a car. It’s a portion of the purchase price, with a lender loaning you the rest of the money. Down payments have many benefits, including the fact that they can reduce your monthly payments and the overall amount of money you need to borrow.

Loan Approval and Flexibility

A large down payment can help you qualify for a loan in the first place, especially if you have lower credit scores. If your credit scores are high, you have more flexibility in the amount of down payment to make. That gives you more options for the type of car you buy, making expensive vehicles more affordable.

Size

A bigger down payment can make you less of a risk to lenders and help you qualify for better loan terms, especially if your credit score is good. For example, if you are considering a new Toyota for sale and want to make a higher down payment, lenders are more likely to see you as financially stable and committed to making your car payments.

At least 10% to 20% of the purchase price as a down payment is good, but if you can go higher than that and stay in line with your budget and financial goals, so much the better. A large down payment can lower your monthly payments by hundreds of dollars.

You can use the current value of a vehicle you already own as part of your down payment in a trade-in. Doing this may allow you to make a much more substantial down payment and lower your monthly payments. You may be able to use dealership cash rebates, too.

Quicker Payoff

When you put down more money upfront for your car, you pay less overall in interest since your balance is lower. The interest rate itself should also go down since your loan-to-value ratio is more favorable. These factors mean you may be able to pay off your car loan more quickly than if you had put down a lesser down payment amount.

Equity in the Car

A hefty down payment can help ensure you are never upside down on your loan. Being upside down means you owe more money to the lender than what the vehicle is worth. Often, this depreciation is not an issue if you have no plans to sell the car and nothing happens to the car. You just keep making payments to your lender as usual.

Difficulties can arise if the car becomes totaled, for example, and insurance pays only for the current value of the car. In such cases, you are likely to owe the lender the balance of the loan but get a check from the insurance company for less of the amount. Plus, you may need a new car to replace the totaled vehicle.

Importance of Down Payment

The size of your down payment matters whether you want to get approved for a loan in the first place, lower your monthly payments, or enjoy lower interest rates. In this sense, down payments are a tool empowering car buyers. Use them strategically to reach your goals.