Some people will drive their old car into the ground and may not consider selling it until it is on its last leg. Others may have applied for an auto title loan, and they have sold their last car to get out of the title loan quickly. Still others strive to trade their vehicle in every few years so that they are always driving the latest car with the trendiest features. Regardless of why you are planning to buy a new car, you likely are preparing to make a down payment on your upcoming purchase. However, it can be difficult to determine what a reasonable down payment amount for a car is. With a closer look, you will be able to determine what the right down payment for your next car is.
Understanding Why a Down Payment Is Important
A down payment on a car is critical for two primary purposes. First, the down payment establishes equity in the car. Cars are generally depreciating assets, and this means that they can lose substantial value in a short period of time in many cases. The last thing you want is to find yourself upside down with your car, owing more on your car than it is worth. When you put down a reasonable down payment amount, you minimize this risk. Second, the down payment will impact the monthly payments. You certainly do not want to have a monthly payment that is not affordable for your budget, so you want to put at least some money down on your purchase.
Determining How Much You Should Put Down on a Car
Each case is unique, but you can follow a general rule of thumb to initially help you to form a reasonable idea about your down payment amount. Used cars typically have already lost some of their value through depreciation, so putting down approximately 10 percent of the sales price is a smart idea. Because new cars have not yet depreciated at all and because the rate of depreciation is typically higher with new rather than used cars, putting down 20 percent of the sales price for a new car is wise.
Reviewing Your Budget
These factors can help you to initially form your down payment concept, but your calculations may need to be revised based on your finances and the car you intend to buy. Use an online loan calculator to estimate your dream car’s monthly payment based on its sales price and your down payment amount. Plug this monthly payment amount into your budget Be sure to adjust your budget for changes in auto insurance and fuel costs related to the new vehicle as well. If you find that you cannot afford the vehicle you want to purchase, you can find a more affordable vehicle or make a larger down payment.
Reducing Your Cash Down Payment With Your Trade-In
Another factor to consider is the trade-in value of your current vehicle. Use an online value estimate to determine its value for basic budgeting and planning. For a more specific trade-in value, take it to the dealership to get an estimate. Your trade-in value minus the current car loan balance will either add to or subtract from your down payment plans. You can also sell your old car online or even find a scrap buyer.
While there is a general rule of thumb regarding an estimated down payment that savvy car buyers will place on a vehicle purchase, you can see that there are some other factors at play that could alter the actual amount you should put down. Keep in mind that these are rules of thumb. If you plan to purchase gap car insurance and if you plan to drive the new vehicle into the ground, making a lower down payment and extending the payments out longer may be a reasonable idea. Carefully explore all options to find the right loan scenario that is ideal for your needs and budget.
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