Pay Now or Pay Later? The Pros and Cons of Making a Large Down Payment on Your Used Car | Exclusive Motorcars (2024)

FAQs

What are the advantages and disadvantages of putting a down payment on a car? ›

Potentially lower rates

A down payment tells your lender that you have a better grasp on your finances and thus are less of a risk for default. However, other factors have a bigger influence on your interest rate, like credit score and income. So this approach is far from guaranteed to get you a lower rate.

It's good practice to make a down payment of at least 20% on a new car (10% for used). A larger down payment can also help you nab a better interest rate. But how much a down payment should be for a car isn't black and white. If you can't afford 10% or 20%, the best down payment is the one you can afford.

Advantages Of A Large Down Payment

Not only will you reduce the size of your loan and lower those monthly payments, but you'll also have financial flexibility in future years. Bottom line: making a large down payment can help put cash back in YOUR pocket and reduce money stress and financial pressure!

What are the disadvantages of a large down payment? Providing more money down doesn't guarantee a lower interest rate, and it can cut into your savings.

While you might have to put forth a larger chunk of money upfront with a big down payment, you'll benefit from smaller monthly payments as a result. More equity in your home. Putting more towards the purchase price of your home upfront means you'll have a much higher stake in your home in the form of higher equity.

There are, in fact, many benefits to making a larger-than usual down payment, as we'll discuss below, including: avoiding having to pay for private mortgage insurance. reducing the amount of your monthly mortgage obligation. reducing the total amount of interest you'll owe.

Smaller home loan balance.

A larger down payment means starting out with a smaller loan amount, which has a few advantages. One of these is that it creates a cushion of home equity even if housing market values decline. That could make the difference in being able to refinance or sell your home in the years ahead.

In general, you should strive to make a down payment of at least 20% of a new car's purchase price. For used cars, try for at least 10% down. If you can't afford the recommended amount, put down as much as you can without draining your savings or emergency funds.

What car payment is too high? ›

Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% to 20% on total car costs such as gas, insurance and maintenance as well as the payment. If that leaves you feeling you can afford only a beat-up jalopy, don't despair.

How much should you put down on a $25,000 car? For a $25,000 car, consider putting down at least $2,500 if it's used or at least $5,000 if it's new. By putting 10% or 20% down depending on the car's condition, you'll have the best options for loan terms and interest rates.

It's not always better to make a large down payment on a house. When it comes to making a down payment, the choice should depend on your own financial goals. It's better to put 20 percent down if you want the lowest possible interest rate and monthly payment.

If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.

Putting down the standard 20% can help you avoid paying mortgage insurance and interest and could save you thousands of dollars. So you can expect to pay between $7,500 an $50,000 as a down payment on a $250,000 purchase. Keep in mind, besides the down payment amount, you will also have to factor in closing costs.

The larger the down payment, the lower your monthly payment will be—and you'll probably get a better interest rate, to boot. The general rule is that your payment will drop about $20 a month for every $1,000 you put down, based on a 5% APR, but this is subject to individual situations and loan terms.

You generally don't need a down payment to get a car loan, but it's in your best interest to make one. A down payment of any size reduces the amount you need to borrow, so your loan will cost less. Compared with a bigger loan with the same terms, you'll have lower monthly payments and pay less interest over time.

Lenders appreciate large down payments because it lowers their financial risk and shows that you're a motivated buyer. The larger your down payment, the less you pay each month in principal and interest. Think of a down payment as an interest-free way to get a jump-start on paying off your home.

Biding time to save for larger down payments can invite other risks as well. One such risk is the prospect of rates going up. Just like waiting too long in line for a hot new restaurant, you might end up paying more if interest rates rise while you're saving.