A down payment is a cash payment made when a deal is made on a pricey product or service. The cash payment is made to represent a certain percentage of the full payment. Many companies that sell expensive products that cannot be paid at once use this policy when making a deal.
When it comes to buying a car, the same principle may apply. After you find the ideal car that you want, you talk to the dealer or the owner on the terms and price. Once the price of the car is stated, you have the liberty to choose how much down payment you give the owner or the dealer. You can choose any percentage you want to pay right there.
Most of the time, a 20% down payment is perfect. However, to some people, that may seem like a lot of money. Some dealers may give you the option to make no down payments at all. But this is dangerous. Whatever you may have heard, you should know that making a good down payment is wise. Here is why.
A Down Payment Will Determine The Interest Rate Charged On A Loan
Interest is calculated based on the whole amount of the loan. Assuming that you bought a car worth $10000 with an interest of 5%, you would be expected to pay an interest of $500 in the first year if you didn’t make a down payment,
On the same case, if you had made a down payment of $2000 at the same 5% interest rate, the interest is calculated on the remaining $8000 which means you now owe $400. That saves you a good $100.
That example shows that paying a big down payment saves you more money in the long run. You should aim to pay a larger down payment if you can afford it. Basically, you should aim for a 20% down payment or more.
Down Payments Determine Your Monthly Payments
As soon as you buy the car, the amount is calculated and distributed into monthly payments. Whatever you owe is what determines how much money you pay each month. Using the above example, if you buy a car worth $10000 and distribute to a specific time with the same interest, you pay more money than you would have if you had given a down payment.
But if you had paid a down payment of $3000, at the same interest rate, the remaining $7000 is distributed into the specific payment months. The amount is lower and the interest on it is lower as well.
It Shows Commitment To The Lender
Usually, the cash you give for down payment is non-refundable no matter what happens. That means that if you go only half-way through with the deal and you want out, you cannot get that money back. It may sound harsh but it comes with benefits. After you make the down payment, your lender can trust you because they know you can never forfeit the deal.
Apart from that, it helps you manage your debts better. Remember it is easy to get caught up with many loans that you aren’t able to pay. So, this is why it is advisable to make a big down payment when you can because this will lower your debt and help you pay it easily. This is best done especially during times when interest rates are exceedingly high. If you want to pay as little interest as possible, then you will have to make a big down payment.
It Helps You To Avoid Being Upside Down.
Upside down mean owing more than the car is worth. This is something that can happen to anyone. You may find yourself paying more than you got. Remember cars depreciate fast. They also require payments such as taxes and other fees that are added to the loan as soon as you get the new car.
This means that as you drive the car out of the dealership, you owe them the exact amount in value of the car at that time. This is dangerous because if something happens to the car before you finish making payments, you may end up paying more than what you have in the car’s value.
For example, if you bought the car for $10000, the value of the car three years later may be around $7000. When the interest, taxes and other fees are added to the $10000, the amount goes up significantly. This is to say that even if you sold the car after three years, the amount you get for it may not be able to pay off the loan.
So How Much Should You Pay?
If you are wondering how much down payment you should make, go for as much as you can. Aim to post a down payment of 20%, or higher, of the price of a product. Not making a down payment will cost you a lot of money in the long run. You don’t want to end up paying more money than you owe.
Making a big down payment is advisable when the interest rates are high. It reduces the interest you have to pay and the monthly payments as well. Reducing the whole amount with a down payment also reduces the time period you have to pay the loan.