Monday, April 14, 2014
How Much Should a Buyer Use for a Down Payment?
Finding the Right Balance
If you plan to purchase a new or used vehicle, it's important to think about the size of your down payment. Edmunds.com reports that the average American car buyer pays about 11% and borrows the rest. Your optimal down payment may be higher or lower. It depends on your current savings, trade-in value, monthly income and average living expenses.
Both Consumer Reports and Edmunds urge drivers to put at least 20% down on new vehicles. This ensures that you won't owe more than the car's value. If you want to buy a used auto, Edmunds suggests a minimum down payment of 10%. A smaller amount is acceptable because cars don't lose value as quickly after the first year or two.
What's the Minimum?
Most banks and auto dealerships maintain minimum down payment rules. They usually expect buyers to pay about 5% to 15% of the price with cash or trade-in credit. If you have a low credit score, you might need to make a larger down payment or accept a relatively high interest rate. You can still save money on interest by choosing a shorter loan term.
When you use a loan calculator to compare different borrowing options, try to achieve a safe balance of savings and extra monthly income. It's best to keep enough money in a savings account to pay your living expenses for at least two months. Spending too much of this money on a down payment can be risky, especially if you lose your job.
On the other hand, high monthly costs can make it hard to save money or pay unforeseen bills. Consumer Reports advises people to spend less than 37% of their income on loan payments and rent. For instance, perhaps a person earns $3,600 per month, has no credit cards and pays an $850 mortgage. He or she ought to aim for a car payment under $482.
A larger down payment will be wasted if you spend too much money on interest. Fernelius Toyota helps drivers in Cheboygan and northern Michigan gain access to the lowest rates available. Several lenders compete to offer customers the best auto loans for our quality pre-owned and new vehicles. If you’re interesting in purchasing a new or used vehicle, stop by our lot today or contact our finance department at 888-409-1731.