You have a sizable amount saved up to use toward a down payment for a car. The first instinct you have may be to put it all down so you can pay off the vehicle faster and try to negotiate a better interest rate to finance the remaining balance. However, using all of your money as a down payment for a car is probably not the best option.
While putting more money down can lower your monthly car payment (we’ll explain how later), if you put your entire savings toward the down payment, you’ll have nothing left. You may have lowered your monthly car payment, yet you could be left financially vulnerable. What if you need a lump sum of money to pay off an unexpected expense?
As you will see, there are upsides and downsides when making the decision to put all of your saved money as a down payment for a vehicle.
The Upsides of a Sizable Down Payment
The biggest upside to a big down payment is that it can help you pay less in financing charges on your auto loan.
First, you can opt for a shorter-term loan. The shorter your loan term, the less you pay toward interest over the life of the loan. Lenders may also give you a better interest rate for a shorter-term loan, just keep in mind a shorter term means higher monthly payments (but fewer of them). As well, a larger down payment means a smaller amount to finance, which could present you as less of a credit risk to lenders than if you were financing a larger amount (and might result in a lower interest rate – or at the very least, you can try to negotiate for it). Over time, you’ll pay less to the lender, which means more money in your pocket in the long run.
If you don’t opt for a shorter-term loan, and instead aim for a longer-term loan with lower payments, that could help make the bills you pay every month more manageable. Although it’s been said that it’s easier than ever to get an auto loan, a person with a low credit score could have a difficult time. If you have a poor credit history, then a higher down payment can be beneficial when you finance a vehicle. (And if you’re not sure if you have good or bad credit, you can check your credit scores, either by purchasing them, or by using a free tool, such as Credit.com’s Credit Report Card. Knowing your credit score ahead of time can help you shop for better rates for an auto loan — and any other type of loan — before you apply.)
The biggest problem you’ll encounter if you deplete all of your savings is that you won’t have any money to fall back on if you come across difficult times. Sure, you may drive around for months without worry, but if you are laid off, or are faced with some other type of financial roadblock, disaster can strike.
This may cause you to be unable to make your monthly payments on time, which could hurt your credit. If you fail to make your auto payments on time, your car could also be at risk of getting repossessed.
Another setback that can occur is the cost of repairs. If you buy a used car and realize it needs repairs that are not covered by the warranty, or the warranty expires, then you might not have any money to fix it.
Make a Wise Decision Based on Your Lifestyle
The best way to determine the amount you put down on a car should be calculated based on your current lifestyle. For instance, a high school senior most likely does not have any other major financial obligations and can afford to put more money toward a car. This will reduce the monthly bill to finance the vehicle and help him or her pay off the remaining balance more easily. It might be a smart decision for someone with fewer serious financial obligations.
On the other hand, a person supporting an entire family might want to budget the amount he or she puts down for an auto loan. The cost of living and paying the monthly mortgage, utility, food or any other bills is a lot of responsibility. Therefore, it’s wiser to keep a portion of your money saved, in case you run into financial hardship there is a source of funding you can tap into.
It’s always a good idea to have money saved. But the decision is ultimately yours. Be sure to calculate the risks associated with putting all of your saved money as a down payment for a vehicle.
Image: Denis Raev