5 Benefits of Making a Down Payment on Your Car Loan

Thinking about buying a new car but unsure about saving for a down payment? While some lenders may offer 100% financing or no down payment options, especially if you have good credit, it might not be the optimal choice. 

As a rule of thumb, aim to make a down payment of around 20% of the purchase price for a new car, and at least 10% for a used one.

If you can't manage the recommended amount, put down as much as you can without depleting your savings or emergency funds. The higher your down payment, the stronger your financial standing will be as you drive off with your new car.

This blog will explain why making a down payment is generally considered the best approach.

5 Benefits of making a down payment on your car loan

1. Lower monthly payments

When you make a down payment, you're essentially reducing the total amount you need to finance, resulting in a lower monthly payment. This means you'll be paying less each month.  It's a smart move for a more manageable and lower monthly loan payment.

2. Lower interest rates

When you put more money down on a car, you're borrowing less to finance it. With a smaller loan amount, you'll be paying interest on a reduced balance, leading to lower total interest costs.

3. Decreases the loan-to-value ratio

The loan-to-value ratio (LTV) compares the loan amount to the value of the vehicle. Lenders set limits on the maximum LTV they'll approve, and increasing your down payment could improve your chances of approval.

Additionally, lenders view the LTV ratio as an indicator of loan risk. When you borrow less relative to the car's value, it reduces the lender's risk of financial loss in case of default. Loans with lower risk often come with lower interest rates.

4. Increases the possibility of getting approved for a car loan easily

Making a down payment could increase your chances of getting approved for an auto loan, particularly if your credit scores are on the lower side. When you don't make a down payment, lenders face more risk if you default on the loan and they have to reclaim and sell the car.

While not making a down payment might not be a deal-breaker with good to excellent credit, lower credit scores could mean facing higher interest rates or potentially being denied a loan altogether.

Read: How to Improve Your Credit Score

5. Reduces the chances of being upside down on your loan

When you purchase a new car, it undergoes about a 20% depreciation hit in the first year. If your down payment is less than 20%, there's a risk of owing more than the car's current value. This situation can be financially tricky. In case you want to sell or trade the car, you'd be responsible for covering the difference.

In the unfortunate event of an accident leading to your car being totaled, the insurance payout, based on the car's cash value, might not cover the full amount you still owe. 

Read: How to Get Out of Negative Equity on Car Loan

Is it a good idea to put zero down on a car?

While there are advantages to making a substantial down payment, it's important not to deplete your savings to take advantage of these benefits. Doing so could have serious repercussions for your financial well-being in case of a financial emergency. Nonetheless, it's advisable to put down some amount, even if it falls short of the recommended 20% for new cars or 10% for used ones.

You might qualify for a car loan with no down payment, but it's crucial to carefully weigh the long-term financial consequences. Not making a down payment can lead to higher monthly payments with added interest, a longer repayment period for the loan, or both. Furthermore, if you owe money on the car and decide to sell it, you're likely to end up owing more than the vehicle's worth.