A number of lenders will let people borrow money for a new car without a down payment. However, this usually isn’t a good idea. You will have to pay a lot more in interest over the years if you had to finance the entire purchase. It is a good idea to save up money for a down payment if you are going to need a new vehicle.
How Much of a Down Payment Do You Need?
Most experts recommend a down payment of 20% or higher to make your loan more affordable. However, many people are paying a lot less down when purchasing a new vehicle. A new study from Edmunds found that the average down payment last year was only 12% of the purchase price. The primary reason that down payments have decreased is that people’s incomes haven’t risen in tandem with inflation.
While it may be more difficult to save for a down payment, doing so should still be a priority when you want a new vehicle. In addition to making higher payments over time, you will also have a difficult time securing a loan. Lenders know that cars depreciate very quickly in value, which means that they are poor collateral if you default on your payments. That is why they typically want to see a down payment of 20% or more.
Weigh the Opportunity Cost Against Savings
Paying a high down payment may be necessary to make your monthly payments more affordable and guarantee a loan. However, you also need to consider the opportunity cost of making a down payment instead of putting your money in savings.
The standard loan for a 60-month car loan is 4.13%, but of course that figure can vary significantly depending on where you live. If you can earn more from your savings, then paying a large down payment could be counterproductive. This is one of the reasons that shooting for a 20-25% down payment is ideal, while higher payments are not.
Consider Other Costs
You will also need to think about other costs that you will face. You will also need to pay for your insurance, gas and maintenance repairs. If you have trouble tracking and budgeting your money or have an irregular income, then you may want to force yourself to pay more money for a down payment. This will alleviate the long-term costs of owning a vehicle.
Costs of Disaster
A larger down payment can also mitigate the costs if your vehicle is stolen or damaged. Your insurance company will only pay the market value of your car. Since cars depreciate about 30% in the first two years, you won’t receive nearly as much as you paid for it. Paying more money down will mean that you won’t owe as much on your loan if something happens.
