A down payment on a car is a payment made at the time of purchasing a vehicle and is usually a portion of the total purchase price. The down payment reduces the amount of the loan or financing required to purchase the car, and is typically a requirement for securing an auto loan. The amount of the down payment can vary, but it is typically a few thousand dollars, or 10-20% of the total purchase price of the vehicle. Making a larger down payment can lower the monthly car payments, and can also help the buyer build equity in the car faster. Additionally, a larger down payment may also make it easier to get approved for a loan or financing, as it shows that the buyer is committed to the purchase and has some financial stability.
Let's say that you are buying a $38,000 vehicle that is financed at a rate of 4.5% for 60 months. After sales taxes in Florida and other fees (not including dealer fees), your monthly payment will come in at $763.62. Over a period of five years, you will have paid $4,857.08 in interest on the car, for a total of $45,817.08. This scenario assumes no down payment. Let's look at the same purchase, but add in a 20% down payment of $7,600. Your down payment falls to $621.93, the loan amount is $33,600, and the loan interest you pay falls to $3,955.87.
By making a down payment, a potential buyer demonstrates a certain amount of stability to the lender. This can make the lender more confident in their ability to repay the loan.
Additionally, a down payment reduces the amount of the loan required, which can lower the monthly payments and overall financial obligation of the buyer. This can make the loan more attractive to the lender and increase the likelihood of approval.
However, it's important to note that while a down payment can be helpful in securing a loan, it's not a guarantee of approval. Lenders will also consider other factors such as the buyer's credit history, income, and debt-to-income ratio when deciding whether to approve a loan.
In 2021, a Honda Accord EX-L had an MSRP that started at just over $31,000. By 2023, that car's value is now $24,675, according to Edmunds. Does a down payment of 20% totally eliminate the depreciation value of a car? No, however, a down payment makes smaller payments on the car possible, giving you a much better chance of staying ahead of depreciation throughout the life of the loan.
Some people have superb credit scores and will likely qualify for a great financing package. According to Experian, a credit score of 781 or higher could qualify you for a 3.84% interest rate. Here are some situations where you might not need to make a down payment on a new vehicle:
The rule of thumb is that 20% of a car's value is a good down payment for a new car. A 10% down payment is often acceptable for a used car. Most people tend to keep their car for eight to ten years. The average car loan term is 72 months for newer cars. Some people who finance used vehicles will finance for a shorter time frame. The perfect time to start saving for your next car is when you are done making payment on your loan. Saving 50% of a $700 car payment that you no longer have to make will help you exceed the 20% down payment threshold.
You can make a down payment on a lease to secure financing, but it's not as helpful as people might think. Down payments on leases can reduce your monthly payments, but don't save you as much money in the long run. A down payment also doesn't necessarily reduce your interest paid over time by that much, since your payment is usually much lower than a car payment. At the end of the day, people who win the most on lease down payments are those who are trying to access the actual financing of their lease because they have a lower credit score.
If you're in the buying cycle for a new car, stop in at Brickell Honda. We can help you find the right model and trim that is well within your budget. Our team is also ready to help you find the right financing and let you take that car for a test drive.
