Navigating Car Purchases: The Role of Down Payments - Money Tip Tuesday

Car buying is a fun and exciting journey. You have a lot of options to explore and decisions to make.  

Of all the many factors considered when purchasing a new or used car, determining how much to put down is an important decision that affects all aspects of the financing process. 

Links: 

• Check out Triangle's competitive auto rates for new purchase or refinance.
• Check out TCU University for more financial education tips and resources! 
• Follow us on Facebook, Instagram and Twitter! 
• Learn more about Triangle Credit Union 

Transcript:

Welcome to Money Tip Tuesday from the Making Money Personal podcast. 

When it comes to purchasing a car, one of the critical decisions you’ll face is how much to put down as a downpayment. Whether you’re eyeing a brand-new model or considering a reliable used car, understanding the significance of down payments can help you make an informed choice. In this tip, we’ll explore why down payments matter and provide practical tips for finding the right balance. 

Why is the amount of your down payment important? 
 

First, it can lower your interest rates: A substantial down payment can significantly impact the interest rate on your auto loan. Lenders view a larger down payment as a sign of financial stability and are more likely to offer you a favorable rate. Lower interest rates mean less money paid over the life of the loan. 
 

Second, it can reduce your monthly payments: By putting more money down upfront, you decrease the amount you need to finance. As a result, your monthly payments become more manageable. This financial breathing room can be especially helpful if you’re on a tight budget. 
 
Third, it helps you avoid negative equity: Negative equity occurs when you owe more on your car loan than the vehicle is worth. A sizable down payment helps prevent this situation. Since cars depreciate rapidly, starting with equity can protect you from being “upside down” in your loan. 
 
Fourth, it improves your loan approval odds: If you have less-than-perfect credit, a substantial down payment can enhance your chances of loan approval. Lenders may be more willing to overlook credit issues when they see a significant upfront investment. 

If you’re wondering how much of a downpayment is ideal, there are some recommended down payment percentages for new and used vehicles. 

 

When purchasing a new car, it’s wise to aim for a down payment of at least 20% of the purchase price.  

• You’re likely to get better rates. With 20% down, lenders are more likely to offer competitive interest rates. 
• It provides an equity cushion. Starting with equity provides a buffer against depreciation. 
• It can help lower your monthly payments. A smaller loan amount means you’ll pay less every month. 

When purchasing a used car, a down payment of 10% is a good starting point.  

• It helps with affordability. Used cars are generally less expensive, so a smaller down payment still provides a reasonable equity cushion. 
• It helps save on interest. Even with 10%, you’ll likely secure better rates than with no down payment. 
• It helps you avoid negative equity. Starting with some equity helps protect against depreciation. 

While the recommended percentages are helpful, the best down payment is one that aligns with your financial situation. If you’re trying to determine how much to put down on your auto purchase, consider the following steps. 

1. Assess Your Budget: Calculate how much you can comfortably afford without straining your finances. Remember that a down payment is just one part of the overall cost of car ownership. 
   
   
2. Evaluate Your Savings: Look at your savings and determine how much you can allocate toward the down payment. If you don’t have a much as you like, set up a dedicated savings account to build up those funds specifically for the car purchase.
   
   
3. Factor in Trade-Ins: If you’re trading in your current vehicle, its value can contribute to your down payment. Get an appraisal to know its worth.
   
   
4. Shop Around for Loans: Compare loan terms and interest rates from different lenders. Some may offer flexibility based on your down payment amount. 

In the world of car buying, down payments play a crucial role. They affect interest rates, monthly payments, and your overall financial well-being. Whether you’re eyeing a sleek sedan or a rugged SUV, take the time to assess your budget, explore financing options, and find the right balance for your down payment. Remember, a well-thought-out down payment can set you on the path to a successful car ownership experience. 

If there are any other tips or topics, you’d like us to cover, let us know at tcupodcast@trianglecu.org.  Like and follow our Making Money Personal FB and IG page and look for our sponsor, Triangle Credit Union on social media to share your thoughts.  

Thanks for listening to today’s Money Tip Tuesday and be sure to check out our other tips and episodes on the Making Money Personal podcast.  

Have a great day!