How to Calculate a Down Payment for a Car
Consider your options., Decide how much you can afford to pay as a down payment., Calculate your monthly payment budget., Shop beforehand., Go to the dealer., Accept an offer., Negotiate your auto loan., Buy auto insurance.
Step-by-Step Guide
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Step 1: Consider your options.
Dealerships make money by offering higher interest loans than other financial institutions.Because of that, you should know ahead of time how much you are willing to spend, and stick to that.
Generally, if you have a credit score above 650, you should be able to get financing through a bank or credit union for a much better interest rate than at a dealership. -
Step 2: Decide how much you can afford to pay as a down payment.
Most analysts recommend putting at least 20% down on your car, although the average down payment in recent years has been only 12%.
The danger of putting less than 20% down is that your car may lose resale value faster than you pay off your loan, leaving you “upside down” or unable to pay off your loan by selling the car.
Unless you have practice investing, it is generally smarter to pay for as much of your car as possible up front rather than investing in savings and using the earnings to make monthly car payments.
The interest cost on the car loan is generally higher than you can expect to earn on a short-term investments.
However, the new zero interest loans might make sense if the price of the car is as low as it would be paying cash.
If you do decide to pay less of a down payment than you can afford, paying at least 20% of the car's cost as a down payment will increase the chances that your car retains its value above the amount outstanding in your loan. , How much can you afford to spend on your car payment each month? And for how long? Consider the type of car you will be buying and how long you will drive it as well, when thinking about the life of your loan. , Use online resources to look at the cars for sale in your area.
Use Kelly Blue Book or Edmunds to find the fair value of the car before going to the dealership.
Make a list of a few cars at different dealerships you would be interested in.
If you want to trade in your current car, look at the fair value of it using one of the same tools.
Most car value calculators include an option to calculate the trade-in value of the car.
Consider buying a used car.
New cars are the most expensive and lose their value a lot faster than used cars.You can buy a one- to three-year-old car and save thousands off the price you would pay for a brand new one. , Once you have an idea of what you want and what you can afford, go look at the cars you wrote down on your list.
Test drive them, and if you like one, make an offer.
Start by offering less than the fair value for the car based on your research.
If the dealer rejects your offer, leave the lot.
You can come back later if you want, but physically leaving will signal that you are serious about looking for a bargain.
Don’t be persuaded to test drive a car you didn’t come to look at.
Because they are paid on commission, dealers will want you to buy as expensive a car as possible, regardless of your financial position.
Make clear that you came to see only a specific car or type of car, and that you won’t stray from that price range.
Don’t tell the dealer about a car you are planning to trade in until after you have made a deal.
This will ensure you get the best offer possible from the dealer before offering to trade in your car. , When you’ve found a car you like for a price that seems right, accept the offer.
Then you can negotiate the type of financing you will get.
You will have to apply for a loan through the dealership, so they will likely want to see your recent pay stubs as proof of income, as well as identification. , This is where your down payment comes in — the more you are able to pay in down payment, the less you have to borrow from the dealership.
The dealer may try to convince you to borrow everything from them — that’s because they earn interest on the money you borrow.
This is also when you should notify the dealer if you are interested in trading in a vehicle.
Think about how long you realistically plan to drive this car as you determine the life of the loan.
A dealer will try to entice you with very low monthly payments, but beware as this tactic will keep you making monthly payments for years to come.
If possible, try to get a loan for three years or less.
A shorter term with a higher monthly payment will save you a lot of money in total rather than making low monthly payments for a very long time. , Dealers will be more open to financing a car with a salvaged title, but you will still need to get insurance on the vehicle you purchase.
If you have pre-existing insurance, you can likely call your agent and add your new vehicle. -
Step 3: Calculate your monthly payment budget.
-
Step 4: Shop beforehand.
-
Step 5: Go to the dealer.
-
Step 6: Accept an offer.
-
Step 7: Negotiate your auto loan.
-
Step 8: Buy auto insurance.
Detailed Guide
Dealerships make money by offering higher interest loans than other financial institutions.Because of that, you should know ahead of time how much you are willing to spend, and stick to that.
Generally, if you have a credit score above 650, you should be able to get financing through a bank or credit union for a much better interest rate than at a dealership.
Most analysts recommend putting at least 20% down on your car, although the average down payment in recent years has been only 12%.
The danger of putting less than 20% down is that your car may lose resale value faster than you pay off your loan, leaving you “upside down” or unable to pay off your loan by selling the car.
Unless you have practice investing, it is generally smarter to pay for as much of your car as possible up front rather than investing in savings and using the earnings to make monthly car payments.
The interest cost on the car loan is generally higher than you can expect to earn on a short-term investments.
However, the new zero interest loans might make sense if the price of the car is as low as it would be paying cash.
If you do decide to pay less of a down payment than you can afford, paying at least 20% of the car's cost as a down payment will increase the chances that your car retains its value above the amount outstanding in your loan. , How much can you afford to spend on your car payment each month? And for how long? Consider the type of car you will be buying and how long you will drive it as well, when thinking about the life of your loan. , Use online resources to look at the cars for sale in your area.
Use Kelly Blue Book or Edmunds to find the fair value of the car before going to the dealership.
Make a list of a few cars at different dealerships you would be interested in.
If you want to trade in your current car, look at the fair value of it using one of the same tools.
Most car value calculators include an option to calculate the trade-in value of the car.
Consider buying a used car.
New cars are the most expensive and lose their value a lot faster than used cars.You can buy a one- to three-year-old car and save thousands off the price you would pay for a brand new one. , Once you have an idea of what you want and what you can afford, go look at the cars you wrote down on your list.
Test drive them, and if you like one, make an offer.
Start by offering less than the fair value for the car based on your research.
If the dealer rejects your offer, leave the lot.
You can come back later if you want, but physically leaving will signal that you are serious about looking for a bargain.
Don’t be persuaded to test drive a car you didn’t come to look at.
Because they are paid on commission, dealers will want you to buy as expensive a car as possible, regardless of your financial position.
Make clear that you came to see only a specific car or type of car, and that you won’t stray from that price range.
Don’t tell the dealer about a car you are planning to trade in until after you have made a deal.
This will ensure you get the best offer possible from the dealer before offering to trade in your car. , When you’ve found a car you like for a price that seems right, accept the offer.
Then you can negotiate the type of financing you will get.
You will have to apply for a loan through the dealership, so they will likely want to see your recent pay stubs as proof of income, as well as identification. , This is where your down payment comes in — the more you are able to pay in down payment, the less you have to borrow from the dealership.
The dealer may try to convince you to borrow everything from them — that’s because they earn interest on the money you borrow.
This is also when you should notify the dealer if you are interested in trading in a vehicle.
Think about how long you realistically plan to drive this car as you determine the life of the loan.
A dealer will try to entice you with very low monthly payments, but beware as this tactic will keep you making monthly payments for years to come.
If possible, try to get a loan for three years or less.
A shorter term with a higher monthly payment will save you a lot of money in total rather than making low monthly payments for a very long time. , Dealers will be more open to financing a car with a salvaged title, but you will still need to get insurance on the vehicle you purchase.
If you have pre-existing insurance, you can likely call your agent and add your new vehicle.
About the Author
Joseph Thomas
Brings years of experience writing about crafts and related subjects.
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