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Down Payments: How Much is Enough?

Posted by Jeff Martin - 15 January, 2013

car down paymentUnless you plan on paying the entire purchase price of your new car upfront, you will need to make a down payment in order to drive off of the lot. While almost every financing option requires you pay some kind of down payment, the exact amount paid is generally up to the person making the purchase. The following tips will help you figure out what percentage of your new vehicle’s price you should hand over as a down payment.

Combating Depreciation

The benefit of making a down payment on your car extends beyond smaller monthly financing payments. Cars are equity as well as a transportation necessity, and have an accelerated rate of depreciation. This means that your car will lose trade-in or resale value quickly. A down payment will combat this depreciation by giving you more up-front equity in your car, which means you own more of the depreciated value right away.

Used vs. New Cars

There are different general guidelines for how much of a down payment you should make on your next car depending on whether it is new or used. New cars have a faster rate of depreciation, while a used car depreciates in value much slower.

This means you can make a down payment that is a smaller percentage of a used car’s value, around 10% compared to the over 20% recommended as a minimum down payment for a new car. Keep this in mind when you are calculating the down payment and when deciding whether a new or used car is the right fit for your budget. This makes late-model used cars popular option as they allow for slower depreciation and a smaller percentage of value you need to pay as a down payment.

Maximize the Budget

While you should still make sure the down payment you make on your next car purchase suits your current budgetary restrictions, it is a good idea to determine the highest possible down payment you can afford to make. Higher down payments result in more owned equity in the vehicle’s property value and easier monthly financing payments. You should also pay above and beyond the minimum monthly payments when your budget allows. This will expedite the ownership process and save you money on interest that is accrued over time.

The best average percentage of a car’s value you should put down as a down payment is between 10 and 20%, dependent on whether the car is new or used. Determine the highest percentage you can afford as a down payment.

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Topics: Car Purchase

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