How Does Your Down Payment Impact Your Success in Securing a Used Car Loan

Buying a used car

There are many lenders and financiers including banks that fund the automotive dreams of many! The best part is that you do not have to wait any longer to buy your dream car. You can make a down payment with whatever amount you have in hand and the rest can be financed with easy repayment options.

This is where the down payment of the car loan comes into play. If you have a certain amount of money which could be part of the lump sum amount needed to buy a used car, you could pay the same as a down payment and avail a used car loan for the rest of the payment.

What is a down payment?

Down payment when it comes to a car loan is the upfront payment that the buyers put towards buying a used car. Making a down payment lessens the overall size and amount of your car loan. The payment can be done in the form of a cheque, cash, demand draft, and/or electronic payments depending on the dealer from whom the vehicle is purchased.

Benefits of making a down payment

Lower EMI month-on-month

Putting money as a down payment lessens the overall amount you need to finance, hence making each month’s EMI less.

More equity starting out

Equity is the difference between the car’s potential sale price and the amount you owe on an auto loan. Bigger down payments increase the equity since you will not need to finance as much through a financier or bank.

Cars are a depreciating asset as we know. As the value of your car decreases, you are more likely to go upside down on your loan, that is, when you owe more money than what your car is worth.

A bigger down payment amount protects against depreciation since the equity acts as a cushion.

You will end up owning a greater portion of your car from the beginning with a bigger down payment amount. This will help you in the long run when you are thinking of selling the car.

A lesser rate of interest

Well, the more you pay the down payment, the better the interest rates are when you avail a loan. Similarly, when you pay fewer EMIs to finish off your loan, the lesser interest you are paying overall. Therefore, paying a handsome down payment is key to financing your car right.

Better acceptance rate

You have a better chance of getting your auto loan approved by paying a bigger down payment. This way the lender knows that you know how to handle your money and they will not think twice before approving the loan. Experts suggest putting down at least 20% of the total amount as a down payment for best results for all possible reasons.

Avoid zero down payment schemes

You must always put down a down payment when purchasing a car. Some experts say it might not be necessary if you can score 0 percent APR — but most people won’t qualify for the same.

Many dealers offer zero-down financing since they stand to make the most in terms of interest when buyers borrow the car’s full price from them. This means more interest paid and a higher chance of becoming upside down on your loan – meaning, you end up paying a lot more than what your car is probably worth.

A zero-down payment offer may also come with a longer loan tenure to counterbalance higher monthly EMIs. Just remember, the longer your loan tenure, the more money you end up paying the lender.

In a Nutshell

You would have gotten a fair idea of how the auto loans work. The more you pay the down payment, the less the interest rate and tenure you will end up investing with the lender. It is always better to keep the down payment ready before starting your venture to buy a car.