If you’re looking to purchase a new car one of the most daunting ideas might be the down payment. You’ve calculated your monthly budget and figured out exactly how much you can pay per month, but what about that lump sum of cash you need to pay just to get the car off the lot? If you’re looking into financing a car and aren’t sure what kind of down payment you’re going to need, we thought we’d try to help by giving you some general information that should make things a little clearer for you.
[ READ MORE: How to create a car budget for your next purchase ]
Why is a down payment required?
For the lender, a down payment is extremely important. If someone purchases a vehicle and doesn’t pay a down payment, but then defaults before even making their first payment, then the car was released to the buyer for a short amount of time for free. A down payment makes sure that the lender gets some money for the sale even if the worst happens early on. Plus, it shows the lender that the person they’re lending the money to should be able to pull finances together to make their payments if they’re able to make the down payment.
Are there any benefits for the purchaser?
The down payment does have a couple of small benefits for the purchaser as well. For starters, the bigger your down payment is the lower your monthly payments are, generally speaking. Some places will also (or instead) lower the interest rate as you increase the down payment.
How much is a typical down payment?
Naturally, your down payment price will vary dealership to dealership, lender to lender, vehicle to vehicle. However, there are some general rules of thumb. If you’re leasing a vehicle, paying a larger down payment is actually counter-intuitive. There’s usually a predetermined and easily visible down payment, just stick to that and you should be fine. When purchasing a vehicle, the general rule of thumb is roughly 10% of the sale price for a used vehicle or 20% for a new one.
Hopefully, this information is helpful to you as you navigate financing your new vehicle. If you’d like further or more specific information, don’t hesitate to give us a call here at Broadway Auto Credit!