If you’re thinking about buying a vehicle, you may be wondering whether you should put a down payment on it.
Paying a bunch of money upfront — at least 20% of the car’s sale price — may not sound appealing or seem to make financial sense.
But in this article, money expert Clark Howard will explain why it does.
Should You Put a Down Payment on a Car?
Clark says that putting more money toward a down payment can be an advantage long term and ultimately save you money.
“If you’re buying a vehicle, the advantage of putting down a substantial down payment is you don’t have an ownership cycle where you’re paying on a car note where you’re always upside down: always owing more on the vehicle than what it’s worth, which can be risky,” Clark says.
There are two very big reasons why you should try to put as much money as possible on your car down payment, Clark says.
2 Reasons Why You Should Always Pay More For a Down Payment
1. Lower Interest Rate
“If you put down more money on a down payment, it makes you eligible potentially for a lower interest rate,” Clark says.
The larger the down payment, the less risk a creditor or lender has to take. As a result, they typically will reward borrowers with a lower interest rate because the loan-to-value ratio on the vehicle is smaller.
2. Shorter Loan Term
Clark says a lower interest rate unlocks another benefit a larger down payment makes possible.
”You should be able, because the payments will be lower, to shorten the term of the loan,” he says.
If you’ve been listening to Clark for a while, you know that one of his money rules is that your auto loan should be no longer than 42 months. If it’s longer than that, “you should buy a cheaper car.” Read more about Clark’s 42-month auto loan rule.
Another great thing about having a shorter loan term is that it allows you to build credit much faster, making you more attractive to lenders whenever you need to borrow again.
The bottom line is that it’s always in your best interest to make a big down payment on a car — if you can afford it.
If you feel that a big down payment is not something that you can handle, remember that the amount doesn’t have to be cash you already have on hand. Here are two ways you can go about it:
- Trade-in or sell your vehicle yourself and put the profits toward your down payment.
- See how you can reduce some expenses and start saving money to buy a car.
In any event, Clark says, “For every possible reason, a substantial down payment is a really great idea.”