You will usually be required to make a down payment when financing a vehicle. This is a designated amount of money you pay up-front to the lender to indicate your interest in purchasing the vehicle. The down payment goes toward the purchase price and will be factored into your monthly payments.
How can a down payment get you better rates? Making a down payment indicates to the lender that you have money in the bank and have the income to support large financial obligations. In fact, the lowest auto loan rates available take your down payment into consideration.
The best auto loan rate available today is offered to those who can prove they are a trustworthy borrower. This involves a good credit score, enough income and the amount you are willing to pay upfront.
By making a larger down payment, you are reducing the amount of money you owe on the car. This affects interest rates because of the way that loan terms work.
A loan term is the length of the loan. In other words, it is a set period of time you have to pay off the balance of the loan. The longer the loan term, the lower the monthly payment. To offset this benefit, lenders tend to charge higher interest.
When you make a larger down payment, you are reducing the length of the loan, therefore allowing you access to lower annual percentage rates (APR). In general, the rule is: for every $1,000 you put down, your monthly payment will drop by $20. Experts recommend putting 20% of the value of the car as a down payment, but the average percentage is generally around 12%
Also, by providing a larger down payment you can build equity faster. Consider the fact that cars lose between 20% and 25% of their value in the first year. If your down payment is low, the amount you owe plus the registration fees, taxes and additional costs can be higher than your car’s worth.
Depending on the lender you choose, you may even receive a reduced rate as a courtesy for paying more upfront. The best-used car loan rates are typically reserved for borrowers who can afford a larger down payment. It might take some time to save for a larger down payment, but it can greatly reduce your costs overall.
Additionally, some lenders offer promotional periods for auto loans. These typically feature no down payment requirement. If you choose to make a down payment with a loan like this, it can give you the added benefit of securing a lower interest rate.