It would seem to be a no-brainer when you get an auto loan to buy a car at Rob Green Nissan. If you put little or no money down, you spend less on your new ride. In reality, making a down payment offers many benefits, such as the following, which includes saving money.
Easier to Get Loan Approval
If you have little or no credit, it may be difficult for you to get any kind of loan. Lenders have no history of your financial responsibility, and so they’re reluctant to leave you with any kind of money. They fear that you may just walk away from your obligation, leaving them to deal with the loss of your payments and with the time and effort it takes to repossess your vehicle.
When you put money down, you have a financial stake in the loan. Lenders believe that you’re less likely to disregard something that you’ve put cash into. They are then more amenable to approving your loan.
Lower Monthly Payments
When you put money down, the amount you have to borrow is lower, which leads to lower monthly payments. For example, assume that you’re paying $35,000 for your vehicle at an Annual Percentage Rate of 4 percent for 60 months.
- With no down payment, your monthly payment amounts to $644.58 for a total cost of $38,674.80.
- If you put $7,000, your loan amount drops to $28,000, and your monthly payment drops to $515.62. Your total cost then becomes $30,939.60 for a savings of $7,735.20, which is more than the down payment.
Lower Total Interest
It follows that if you have a lower loan amount due to the down payment, your total interest payment also goes down. You want to keep this part of the loan as low as possible because it offers no material benefit. You’re paying to use the money, which is profit for the lender.
Using the previous example, your total interest cost with no down payment runs about $3,675. When you add the down payment of almost 20%, your total interest cost falls to around $2,940, which equals a savings of $735. This is more than one month’s payment.
A down payment may also get you a lower interest rate because of the lower loan-to-value ratio, which is the amount that you borrow measured against the car’s value.
Compensating for Depreciation
When you buy a new car, it depreciates the minute you drive it off the lot. It may go down in value by as much as 25 percent in the first year. If you do not make a big down payment, you may end up owing more on the car than it is worth. You have negative equity and your loan becomes upside down.
This makes it difficult or impossible to sell your car when you need money or to trade the vehicle when you want a new ride. That’s because whatever financial benefit you gain will not offset the amount that you still owe on the loan.
What If You Can’t Put Money Down
You may be convinced of the benefits of making a down payment but you may still be unable to afford it. Here are a few suggestions for taking care of financing:
- Buy a less expensive model. The car you want may be available in a lower-cost trim with few options. Or if you have your heart set on particular features, a cheaper model may have all the options you want but cost less.
- Get gap insurance. This insurance takes care of the gap that exists between what you owe on your car and what your insurer would pay if the car is damaged beyond repair.
- Ask a co-signer to go in on the loan with you. If you’re having trouble qualifying for a loan, getting a co-signer with a responsible credit history can help. Because the co-signer is equally responsible for repaying the obligation, lenders are more likely to give you the loan.
What to Do Now
Below every description of the vehicles that we have at Rob Green Nissan is an online payment calculator that you can use to see how a down payment can affect your monthly payment. Give this a try. Then fill out our Finance Application. You’ll know in advance how much you can afford and can shop only for vehicles in that price range.
