Is It Necessary to Put a Down Payment on my Car Loan?
Jordan L Bourland Leave a comment
An auto loan without a down payment? See what a down payment can do for you. There are many reasons why people choose to pay down payment amounts that are so much lower than the recommendation of financial advisers. According to Edmunds.com, conventional wisdom is that 20 percent is what many financial advisers recommend as a down payment when purchasing a vehicle, yet, the majority of consumers who put up a down payment is at an average of 12 percent. Lets look at why.
I Can’t Afford A Down Payment.
Car Costs Are Up but Income is Down
In 2013, new vehicle costs rose by an average of just over one percent for the fifth consecutive year after declining between 1998 and 2008. However, many Americans are finding that their paychecks are not increasing to match the rising price of new cars. As of October 2014, salaries had risen just over two percent over the past year, only slightly ahead of inflation. This leaves very little room in the average budget to put 20 percent down on a new vehicle. Giving a down payment is a better way to get a car loan even if its not 20 percent.
Average New Car Price
According to Bankrate, the average cost of a new car in the United States is $32,086. This means that for a buyer to put a down payment of 20 percent on a new car, they would need to have cash-on-hand in the amount of $6,417, an amount that the average consumer may not have on hand. With this in mind, many people may request a minimum down payment on the car and finance the balance. There are some tips, however, for avoiding a high monthly payment, when you give the best down payment you can even with a smaller down payment.
Tips That Will Help You Get Started Choosing A Car Loan
Know Your Financial Situation
Before deciding to purchase a car with an auto loan, it is critical to understand your financial situation. The first step is to check your credit report to be sure you qualify for a car loan. If your credit is less than perfect, you can still obtain financing, although your interest rate may be higher than someone with perfect credit. It may be harder to get financing with poor credit, if you do not have a down payment. Therefore, correcting any problems on your credit report before going shopping for a new vehicle is strongly advised. You will also need to provide proof of income and address to the lender when you apply for the loan, so be sure to have that information available and take the right steps to reconstruct your credit score.
Shop Around and Negotiate
If you decide to purchase a new car without a down payment, shop around before agreeing to purchase. Many car dealers will attempt to trick you into a loan with a high interest rate, which is why you should check several dealers and negotiate not only the price of the car, but the loan terms as well. Auto loan brokers such as Valley Auto Loans can search auto loan lenders for you so you won’t have to spend your time running around. Many financial advisers recommend that you arrange financing by getting pre-qualified for an auto loan before you visit the dealership as that often provides for better negotiations.
Sell Your Old Car
If you have an old car that you are considering trading in to purchase a new one, it is often better financially if you sell the car yourself, especially if the car is in excellent condition with low mileage. However, if your car has mechanical problems or is in poor condition, it may be difficult to sell. In that case, it is better to trade in your current vehicle at the dealer to lower your down payment when financing. Keep in mind that no matter what condition the vehicle is in, the dealer will offer less than the trade-in value for the car, so you will need to factor that in when determining how much you will have for a down payment if part of that down payment is the trade-in of your vehicle.
Lower Monthly Costs
You should try to give a decent down payment to lower your monthly payments. However, what many consumers do not know is that a lender can do a number of things to get the monthly payment where you need it to be to fit your budget. If your credit rating is high enough, they can lower the interest rate or they can offer a longer term of the loan, allowing you to pay for six years rather than five, for example. Therefore, other options are available if you do not have a large down payment or would prefer not putting a large sum down on a vehicle initially. This can also be offered if you are simply refinancing you car for lower payments.
Cash Rebates
During certain times of the year, many auto manufacturers and dealers offer cash rebates on specific vehicle models in an effort to boost sales. A cash rebate is a good way to put a down payment on a car without having to take money out of your own pocket. Some dealers even offer rebates on new-car leases as well, but they don’t serve as cash on signing or a down payment. In those cases, the cash often goes to the dealer who then applies the rebate as a lower down payment or a lower monthly payment on the lease. Some dealers won’t tell you about the rebates but use them in the negotiating price that you may find out later at the signing so ask about them during price negotiating. Also check to see if the car you are considering is eligible for tax credits for alternate fuel or electric vehicles. The tax incentives could easily pay back the money you use on your down payment so it’s like not having to loose the cash down payment you came up with.
Financial Company Benefits
Financial companies prefer down payments as it provides them with cash at the beginning of the loan so that if the buy defaults, they still have some cash collected. A down payment also offsets the instant depreciation on a new car so that if there is an accident or if the buyer defaults, the finance company does not suffer as great a loss. This is why many lenders offer lower interest rates to buyers who provide higher down payments as it indicates a buyer who is more likely to make payments regularly and on time than one who does not.
Beware Dealer Financing
Whether you decide to put a down payment on a vehicle or trade one in, it is important to review all documents placed in front of you by the dealer. Many times, buyers only focus on the purchase price of the car, but if you are financing the vehicle through a dealer-based finance company, check all documents to be sure you are getting the right interest rate and that all deductions are entered correctly. If you are using a trade-in as a down payment, check to be sure that the amount quoted you on your trade is the amount entered on all financial documents, as some dealers will enter a lower amount on documents than they tell you. Ask about taxes and licenses fees as well that could raise the cost of the vehicle. Consider negotiating the price of the car and leaving the dealership before discussing the financing in order to broker an even better deal. Again, if possible, arrange financing before going to the dealer in order to eliminate deceptive practices or in-house auto loans, when you are purchasing the vehicle.
Buying a new car is exciting, but it is important to understand the many aspects of financing the vehicle as well. Although a down payment can reduce your monthly payments and may be required if your credit is poor, not every lender or dealer requires down payments in order for those of high risk to qualify to finance a vehicle. Consider obtaining financing prior to arrival at the dealership to make the car buying experience even less stressful.
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