Benefits of a Down Payment
When you finance your car purchase at John Thornton Chevrolet near Atlanta, GA, one of the questions you may ask is whether you should make a down payment and if so, how much. Find out the answers to those questions.
Getting Approved
If you have no down payment and have a poor credit score, you may find it difficult to get any kind of a loan. Lenders will not want to take a risk on someone who can just walk away from the deal, leaving them with the loss of monthly payments and the need to repossess the vehicle, which takes time, effort, and additional expense.
Your Credit Score
Lowering Your Monthly Payment
Paying Less Interest
If you put money down to lower the loan amount and the monthly payments, it follows that your total interest payments will go down as well. In the previous example, the total interest paid for a loan with no down payment is $2,546. Adding the down payment reduces the total to $2,037, a savings of $509. A large down payment can also lower your interest rate because lenders see you as less of a financial risk. Your loan-to-value ratio, which is the amount of the loan versus the price of the vehicle, is lower.
Taking Care of Depreciation
This could cause problems if you want to sell or trade-in your vehicle. You won’t get enough for it to cover what remains on the loan. If your vehicle is totaled in an accident, the insurance company won’t compensate you enough to take care of what you owe.
The easy solution to this is to put down at least 20 percent to offset the cost of depreciation. You can also buy gap insurance, which covers the difference between what the car is worth and its depreciated value if it is totaled.
What Next?
Getting Approved
A down payment is an initial contribution of cash that amounts to a percentage of your purchase price. Lenders look more favorably on financing with a down payment because you now have money invested in what you’re buying. It’s not likely you’ll walk away from your own money, making lenders more likely to approve your loan.
If you have no down payment and have a poor credit score, you may find it difficult to get any kind of a loan. Lenders will not want to take a risk on someone who can just walk away from the deal, leaving them with the loss of monthly payments and the need to repossess the vehicle, which takes time, effort, and additional expense.
Your Credit Score
Your credit score determines what kind of an interest rate you can get. It’s a number between 300 to 850 that shows your creditworthiness at a glance. A score above 800 gets you the best terms while one under 680 makes you a poor risk. To find out what your credit score is, go to AnnualCreditReport.com and order one from each of the major credit bureaus: Equifax, Experian, or Transunion. You’re entitled to one free report each year from each bureau.
Lowering Your Monthly Payment
Because the down payment reduces the amount you need to borrow, you lower your monthly payment, which can bring you savings over the long term. For example, if you finance $30,000 with no down at an Annual Percentage Rate of 4.05 percent over 48 months:
- With no down payment, your monthly payment reaches $678 for a total of $32,544.
- If you put $6,000 down, your monthly payment drops to $542 for a total of $26,016, a savings of $6,528, which is more than the down payment.
Paying Less Interest
The interest you pay represents profit for lenders. It brings you no material perks other than being able to stretch out your payment over many years. So you want to keep the money you spend on interest as low as possible.
If you put money down to lower the loan amount and the monthly payments, it follows that your total interest payments will go down as well. In the previous example, the total interest paid for a loan with no down payment is $2,546. Adding the down payment reduces the total to $2,037, a savings of $509. A large down payment can also lower your interest rate because lenders see you as less of a financial risk. Your loan-to-value ratio, which is the amount of the loan versus the price of the vehicle, is lower.
Taking Care of Depreciation
The minute you drive a vehicle off our dealership, it depreciates, or loses value over time. NerdWallet estimates that a new car depreciates by as much as 20 to 30 percent in the first year. If you don’t account for depreciation when you make your down payment, your loan could become upside-down or saddle you with negative equity. You’ll owe more money on the vehicle than it’s actual worth.
This could cause problems if you want to sell or trade-in your vehicle. You won’t get enough for it to cover what remains on the loan. If your vehicle is totaled in an accident, the insurance company won’t compensate you enough to take care of what you owe.
The easy solution to this is to put down at least 20 percent to offset the cost of depreciation. You can also buy gap insurance, which covers the difference between what the car is worth and its depreciated value if it is totaled.
What Next?
If you have any questions about a down payment or financing a purchase, call our Finance Department at John Thornton Chevrolet for answers. Fill out our Quick Application online to get pre-approved for a loan. You’ll then get an estimate of your monthly payments using real-world numbers. You’ll know what you can afford before you come down and can limit your browsing to vehicles that meet your price.