Buying a car is a big first step for many. A car loan is often times the first important financial decision anyone ever has to make. It’s an important step to take, as a history of making timely car payments is essential for a healthy credit score. The ultimate goal is to get a good rate on a 30 year home loan and having a completed car loan on your record looks nice. What is crippling to your future however is defaulting on your car loan.
The question today is: What’s a good down payment? The answer should be: as much as you can afford. The worst thing you can do is default, remember. So the goal of a down payment is to pay down the balance of the loan as low as possible. By doing so, you will have lower more affordable payments for the life of the loan, thus reducing your risk of not being able to afford the payments in the future.
A good rule of thumb for a down payment is 25% of the price of the car. So for example on a $10,000 vehicle a good down payment is $2,500. If you do not have the discipline to save that much for a down payment then you will not have the discipline to make your monthly payments either.
There’s another advantage to making a large down payment other than lowering your principal balance. By making a sizable down payment you are showing the lender that you do not plan to default on your obligations, as you have a lot to lose. This results in getting lower interest rates. Lower interest rates means lower monthly car payments.
If you have bad credit a good sized down payment may be the only way you can even qualify for a car loan. But regardless of your credit, making a 25% or more down payment is a good rule of thumb.