Benefits of a Down Payment
When you buy a vehicle from Herrin-Gear Chevrolet in Jackson, MI, you may want to think about making a down payment. This small percentage of the full price means more money out of your pocket when you’re trying to save cash during financing. But paying it also offers many benefits.
Lower Monthly Payments
Making a down payment reduces the loan amount that you have to finance, which in turn leads to lower monthly installments.
Assume that you have a $30,000 loan at an Annual Percentage Rate of 3.5 percent over a term of 48 months.
• If you have no money down, your monthly installment runs $670.48 for a total payment of $32,192.64.
• If you put down $6,000, the amount finance drops to $24,000, which produces a monthly installment of $536.54. The total payment drops to $31,754.11, a savings of $438.53.
Easier Loan Approvals
If you have poor credit or no credit, you may find it difficult to get an auto loan. Lenders think that you’re a poor risk for money because they’re afraid that you’ll stop paying at any time. They then have to cope with the loss of income from you plus the time and expense it takes to repossess your vehicle.
Once make a down payment, that reluctance on the part of lenders disappears. You’ve suddenly added your financial stake to the equation, making it less likely that you’ll walk away from your obligations. They’re then more likely to approve your car loan.
Lower Total Interest
Interest is what you pay lenders to divide the total price you owe into manageable monthly installments that stretch out four or five years. It provides them with profit but gives you no material advantage. So, you want to keep your total interest cost to as low an amount as possible.
When you make a down payment, you pay less total interest because the amount financed is lower. Using the previous example again, your total interest cost with the $30,000 loan and no down payment reaches $2,192. When you put down $6,000, your total interest cost goes down to $1,754.11.
One another effect that a down payment can have on your interest is a lower Annual Percentage Rate. Lenders are willing to give you a break on interest because you’re putting some money in and the loan-to-value ratio, or what you owe versus the value of the car, is lower.
Staying Right Side Up
The vehicle you buy loses its value the second you drive it off the lot. New cars can lose from 25 to 35 percent of their worth in the first year. Your loan may end up being upside down: you owe more on the loan than the depreciated value of the car. This can prove to be a problem if you want to sell your vehicle for cash, trade it in for a new model, or it is totaled and you put in for compensation. The money you receive will not be enough to pay for the loan.
Putting in at least 20 percent takes care of this issue by compensating for the loss of depreciation.
What If You Can’t Afford a Down Payment
As much as you want to take advantage of a down payment, you may just not have the money to afford it. You can counter that problem with the following options:
• Go for a cheaper car. You may be able to afford the model you want if you take a lower-level trim. If you want certain features for your drive, see if you can find a less expensive model that has those features.
• Buy gap insurance. If your car is totaled, this coverage will compensate you for the difference between what you owe on the auto loan and what the car is worth.
What to Do Now
If you have any questions, please contact the Finance Department at Herrin-Gear Chevrolet for answers. You can calculate how your estimated monthly installments change with different down payments through our online Payment Calculator. If you want to know how much vehicle you can afford, fill out our no-obligation online Finance Application. You can then confine your shopping to models that meet your price range.