We all know that when we buy a car, we are making a financial commitment – this is merely part and parcel of the effort it takes to own a car, especially when you are eyeing that dream car you’ve always wanted. But while you can easily get a car with little down payment (or even none at all), does it make sense to buy a car this way? Should you really use your savings for a car down payment when you can have your own vehicle without shelling out any cash? Let’s look at the pros of paying a down payment for a car and see if it works for you.
The pros of making a down payment
The obvious truth is that few people can afford to pay cash for a car outright. If you’re lucky enough to pay cash for a vehicle right away, then good for you. But most of us have to settle for a loan for a car, even if we come up with a little bit for a down payment. The good news, though, is that if you can come up with a down payment for a car, you can reduce the loan to value ratio of your purchase – meaning the amount of the loan you have divided by the vehicle’s cash value. And if you have a better (and lower) loan to value ratio, then you may be able to acquire a better deal for a loan, one which has shorter terms, a more reasonable rate of interest, and lower monthly payments.
You can get a better deal or arrangement
Another advantage of coming up with a down payment for a car is that you don’t have to owe more money than the car is actually worth. If you owe more than a car is worth, this can result in negative equity – and this can affect you in different ways. For example, if your car is totaled or stolen or if you have to sell it, you will still be paying monthly payments. And since the car has a lower worth, your insurance provider will probably not pay you enough for the total cost of the car. In the end, you may have to pay full price for a vehicle you don’t even have any longer.
Shorter terms are sweeter
If you can come up with a bigger down payment for the car, you can score shorter loan terms as well, as confirmed by specialists in new and used cars Utah such as Young Automotive. This helps reduce the length of time you need to pay off your loan. Even if you have to pay more cash at the beginning, you will still save more money in the long term. A shorter term for a loan is also useful and helpful since vehicles will automatically depreciate as soon as you drive them from the car lot. The longer you have to pay off a loan, the higher the drop in the value of your car. This means that at some point, the car’s value will be less than what you are paying for it, and your options will become affected if you choose to trade in the vehicle in the future.
In most cases, a down payment of about 20% is ideal, since the amount will be big enough to prevent you from paying much more than the car is worth, and it also makes it easier for you to afford a car you wouldn’t normally be able to afford if you were to pay full price for it.
Image attributed toPixabay.com