What Kind of Down Payment Do I Need to Finance a Car?

What Kind of Down Payment Do I Need to Finance a Car?

Many people believe that you don’t get financing for used cars. However, several banks, credit unions and financial institutions offer excellent financing for used car purchases. In fact, you’ll find lots of car dealerships offering great finance deals to buyers looking for used cars. Now that you know that it’s possible to get a loan, your next question will be how much should you set aside for a down payment. Let’s look at some factors involved:

Your Credit Rating

Before you opt for financing for any purchase, you should consider getting a credit rating. Remember that the better your rating, the less interest you’ll have to pay, which means that you’ll end up paying less for your car over time. It is also important to know what you qualify for. If you don’t know this yourself, your lenders might be able to trick you into a bad deal.

The Type of Car

Remember that certain cars have a better resale value as compared to others. Since you’re buying a used car, you avoid the 20 percent depreciation that’s associated with new cars the moment they are driven off the lot. In the case of used cars, the more the resale value, the less you can spend on insurance. This way, if you want to sell the car before it’s paid off, you’ll be on the safer side. For instance, say you buy a car with a 20% down payment and it depreciates 10% annually. If you want to sell it after one year, you can do so as you won’t owe more than the car’s worth. On the other hand, if you own a car that depreciates 25% annually, you will owe more money than the car’s value.

Your Monthly Budget

The rule is simple – pay more in a down payment, pay less in monthly payments. If you want to fit the car into your budget, the best way to do so is to put down more money. On average, for every $1,000 down payment, you can save up to $25 to $30 in your monthly budget, based on your interest rate. If you opt for a zero down payment offer, you’ll end up spending a lot more every month and in such cases, if there are any additional expenses in some months, you’ll find yourself in a major financial pickle.

Better Investment Opportunities

While everyone says that paying more money for a down payment is the best, you should also consider other investment options. For instance, your interest rate for the car is four percent, but you can put your money somewhere else and get a seven percent return. In such cases, you can opt for a lower down payment and invest the money you have saved for a higher return.

Don’t blindly follow the down payment numbers when you’re planning to buy a used car. It is better to do the math yourself, understand where your money will earn maximum returns and only then pay your down payment. Used cars depreciate lower than new cars so you have an opportunity to pay a smaller down payment.