Pay Now or Pay Later? The Pros and Cons of Making a Large Down Payment on Your Used Car | Exclusive Motorcars (2024)

FAQs

What are the disadvantages of a large down payment on a car? ›

What Are the Disadvantages of a Large Down Payment? Providing more money down doesn't guarantee a lower interest rate, and it can cut into your savings. Depending on the vehicle you choose to buy, 50% can be a lot of money to put down on an auto loan.

Putting down a larger down payment will increase your equity because you won't need to finance as much through a lender. Cars are a depreciating asset. As the value of your vehicle decreases, you're more likely to go upside down on your loan — when you owe more than your car is worth.

YOU'LL GET A BETTER DEAL ON A CAR LOAN

If you make a down payment, you'll still finance or borrow the remainder of the cost. But the payment reduces your loan-to-value ratio—the amount of your loan divided by the cash value of the vehicle. A lower loan-to-value ratio often leads to better loan deals.

Monthly Payments: A sizable car lease down payment will reduce your monthly lease amount, but it's unlikely to save you money in the long run, thanks to the lower money factor — and thus lower interest rates — on a lease. Interest: Where there's a low money factor, there are lower interest rates.

It's good practice to make a down payment of at least 20% on a new car (10% for used). A larger down payment can also help you nab a better interest rate. But how much a down payment should be for a car isn't black and white. If you can't afford 10% or 20%, the best down payment is the one you can afford.

Putting money down on a house also helps lower your total loan amount. The less money you borrow, the more money you save on interest over the life of the loan. A larger down payment may help you purchase a higher-priced home or get a lower interest rate.

If you put a large chunk of it into your down payment, you may not have as much available in case of emergencies. You may also need to be more careful with your monthly budgeting. In some cases, this can be very inconvenient. The money cannot be invested elsewhere.

A larger down payment means it's more likely you'll receive a mortgage since you are less risk to a lender. It also means you will own more of the value of your home, and a lower loan-to-value ratio (LTV) may help you qualify for lower interest rates and fewer fees.

When you make a really large down payment, say around 50%, you're going to see your auto loan really change for the better. Making a down payment as large as 50%t not only improves your chances for car loan approval, it also: Reduces interest charges. Gives you a much smaller monthly payment.

Making monthly payments over time may be more manageable for your budget than paying the full price upfront. You can build your credit. When you make on-time car payments, your credit report shows that your auto loan is current or paid as agreed.

How much money should you put down on a 25000 car? ›

How much should you put down on a $25,000 car? For a $25,000 car, consider putting down at least $2,500 if it's used or at least $5,000 if it's new. By putting 10% or 20% down depending on the car's condition, you'll have the best options for loan terms and interest rates.

Can you pay off a 72-month car loan early? Yes, you can pay off a 72- or 84-month auto loan early. Since these are long repayment terms, you could save considerable money by covering the interest related to a shorter period of time.

Will my car payment go down if I pay extra? Your car payment won't go down if you pay extra, but you'll pay the loan off faster. Paying extra can also save you money on interest depending on how soon you pay the loan off and how high your interest rate is.

In general, you should strive to make a down payment of at least 20% of a new car's purchase price. For used cars, try for at least 10% down. If you can't afford the recommended amount, put down as much as you can without draining your savings or emergency funds.

You can often secure better rates with a larger down payment, but you also need to understand how much you can afford. Paying too little for your down payment might cost more over time, while paying too much may drain your savings. A lender will look at your down payment and determine which mortgage is best.

But if you want the best deal, the cons outweigh the pros. Forgoing a down payment generally means that your auto loan will have a higher interest rate, increasing your long-term costs. Your monthly payment will also be higher since you're financing a larger amount, increasing your short-term costs as well.

You can put as much as you want as a down payment but most lenders that dealerships use have a minimum amount financed. That amount can vary but most are $7500, some at $5000 and anything less gets harder to get a loan with lenders that offer good rates.

Car dealerships know from experience that banks and other lenders are more willing to finance vehicle sales and leases in which the buyer (or lessee) has made a significant down payment.