How Does Down Payment Affect Monthly Payment?

Auto FinancingWhen buying a vehicle, it is important to consider your overall price. In addition to the overall price of the vehicle, you need decide the amount of money that you can afford to put down and how much you want to pay per month. All three factors are important in determing how much the vehicle will cost you each month, and what the total cost of ownership will be.

Bigger Down Payment, Smaller Loan

Putting more money down on a vehicle is going to save you money. A larger down payment reduces the size of the loan. This means that your monthly payments will be smaller because the overall loan is smaller. The more money you pay now, the less money you will have to pay later.  The main factor here is the way interest adds up over time.  If you finance less, the interest added to the cost of the vehicle can be significantly less over the life of the loan.

Interest Rates

If you are able to put down a large down payment on the vehicle you are buying, your lender is more likely to give you a better interest rate. A bank charges interest on any loan, which means they tack on a percentage of the borrowed amount for each month. If you have a high interest rate, you will be paying more money per month. This means that you will be paying less money overall for the vehicle you are purchasing.

Time

If you are getting a loan that has payments spread out over years, a large down payment will have a significant impact on your monthly payments. While this is good, consumers need to remember that the longer it takes you to pay off a loan, the more money you will pay in interest. A loan that spans a shorter amount of time, paired with a large down payment, is going to save you the most money overall.

Most consumers only put down a small amount of money, usually around 5% of the actual price of the vehicle. This means that they have to borrow more money, which means that they will end up paying more for the vehicle in the long run. If you can put down more money on the vehicle, you have a little more power over the interest rates and duration of your car loan.

How big of a down payment do you think is necessary? How long do you think a car loan should be? Leave a comment in the box below.

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