Taking out a personal loan or auto loan is a big decision. Because of interest charges, it's often smart to make the biggest down payment on a car you can afford. However, in some situations, it might be wise to save some of that extra cash.
Here are a few instances where you might want to consider making a smaller down payment.
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1. You qualify for a low interest rate
The best loans for good credit often come with fairly low interest rates, especially when you're looking at auto loans. Some banks and credit unions charge their most creditworthy borrowers interest rates around 3% to 4% for a car loan.
If you can get an interest rate close to 3%, it might make sense to borrow a little more and save some of your extra cash for other expenses. After all, if you take out a $15,000 car loan at 3% and pay it off in four years, you'll only end up spending $937 on interest fees over the course of four years. Putting down an extra $3,000 and only borrowing $12,000 will leave you paying $749 total in interest, meaning you're only saving $188 on the loan. In the end, you might be able to put that extra $3,000 to better use.
2. You'd have to drain your savings to make a bigger down payment
If you have to tap into your only savings account to make a bigger down payment, doing so might not be the best financial choice. It's smart to keep a healthy emergency fund -- at least three to six months' worth of living expenses.
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This is especially true once you become a car owner. Car ownership comes with an array of additional costs, including:
Even if it's not three to six months of expenses, if you're going to buy a car, you want to try your best to have a little cash in your savings to help with these expenses.
3. You won't be upside down on your loan
If you're upside down on your car loan, it means you owe more than your car is worth. Because cars quickly depreciate in value, it's easy to end up in this situation if you use a loan to pay for all or almost all of the cost of buying a car. This is especially true if you stretch out your loan term to minimize your monthly payments.
This can be a dangerous situation if you get into an accident and your car is totaled. You'll need to pay off your car loan, and your insurance will only pay you the value of the car. If you're upside down, this could mean spending thousands out of pocket to pay off a car that's no longer running.
At the very least, it's important to make a big enough down payment to ensure you won't end up upside down on your car loan. Opting for a shorter loan term can help you avoid this situation as well. As long as you're doing this, you can probably get away with making a smaller down payment.
4. You can afford big monthly payments
Generally speaking, the bigger your down payment, the smaller your monthly payments. If you can afford to make heftier monthly payments, you can afford to put up a smaller down payment.
Keep in mind that making a smaller down payment will usually result in spending more money on interest. While this might be worth it in some cases, interest fees are often an unnecessary drag on your personal finances. Whether you decide to put all your cash down or save a few thousand, don't forget to do what you can to minimize your interest charges and pay off your debt on time.
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July 06, 2021 at 06:00PM
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4 Times You Might Want to Make a Small Down Payment on a Car - Motley Fool
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