It’s tempting to jump into the car-buying process without a lot of thought. Most people are ready for that sweet new ride, however, taking a little time to plan can save you some money in the long run. Two places that can elevate the cost of a vehicle are your credit (or interest rate) and the down payment. Both will have an essential role in the final cost you pay for a car. While both of these things work together, a down payment can make a big difference in what ends up coming out of your bank account.
What is a Down Payment?
Most people don’t have the luxury of paying for a large purchase, in full, instantaneously. Instead, they finance (or borrow) the money and pay it back on a set schedule. A down payment works to bring the amount you finance down. It’s a large chunk of money that you pay up front that can make a difference in both what you can buy and what your monthly payments are. Down payments can also get you a lower interest rate if it’s large enough, or get you into a loan when you have poor or no credit.
Will a Down Payment Save You Money?
The quick answer is yes. A down payment can absolutely save you money. To break it down further, it’s helpful to look at some numbers.
Save on Interest: Let’s say you purchase a $10,000 car, truck or SUV. Maybe you put $1000 down, which means you’ll finance $9,000. If you’re interest rate is 5%, the interest will total $1,190. If you are able to put $3,000 down, your interest become $926, meaning you’ve just saved $264. The higher the interest rate, the more you'll save. For high risk buyers, a bigger down payment is very beneficial.
Save on monthly payment: Let’s put the same scenario in place, but in regards to monthly payments. If you put $1,000 down, your monthly payment is $170 for a 60-month term. If you put $3,000, that becomes $132 per month, saving you $32 per month, which adds up over time.
I Barely Scrape By Financially Each Month – How Will I Get a Down Payment Together?
A large number of Americans live paycheck to paycheck. There’s no shame in that—the costs of living in today’s world are much higher than in the past, and pay increases haven’t caught up with inflation. So how can you put together enough money for a good down payment? The answer is: get creative! Here are a few ways to gather some money together quickly:
- Look at your budget and make cuts – One way to instantly save more per month is to take a close look at your budget and trim the extras. Do you buy lunch every day? Start taking it. Do you buy coffee every day? Invest in a go cup and brew it at home. Sacrificing life’s little pleasures for a few months may be enough to gather a good down payment. However, if you don’t have room to cut, there are other options.
- Ask for a raise – How long have you been at your job? When was the last time you got a raise? If you’re a valued employee with a long history, you have every right to ask for a boost in your income. Here are some ways to approach your employer.
- Sell some stuff – We all have clutter, and some of that clutter is valuable. It’s always a good time to sift through the extra unused items and utilize sites like Craigslist and eBay. It’s amazing how much you can make.
- Find odd jobs – The internet has made it easy to find side gigs. Sign up to be an evening babysitter, pet walker or errand runner. There are plenty of articles out there about how to make extra income.
Equity is Nice, and Keeps You Safe
Another benefit to down payments is the reduced risk of upside down equity. The more you’ve paid on a vehicle (the less you owe), the better off you’ll be if you run into emergent circumstances where you have to sell it. If you owe more than it’s worth, it can create problems and hurt you financially.
Pay Your Car Off Quicker
One final reason to work toward a good down payment is the ability to pay a vehicle off quicker. If you put more down, you’re more likely able to get a shorter loan term. This will help take "monthly car payment" off your budget quicker.
If you’re ready to purchase your next car, start saving for that big down payment today.
