Debt Management
If you're planning to apply for a car loan, you may already be wondering about the car's colour. Or maybe you're excited about the sunroof, engine power, and all the extra features. But have you considered the down payment on the car? It's easy to overlook but trust us, it's important. In this article, we'll explain why the down payment matters and how it can significantly impact your loan. Let's dive in!
What is a down payment?
It's the money you pay upfront when buying something costly, like a house or car. It represents a percentage of the total purchase price, and the remaining amount is usually covered through financing. How much you put on a down payment affects your loan in more ways than one. It determines how much you'll owe the bank, the interest rate you'll be charged, the loan repayment period, and your monthly instalments. Curious about how all this works? Read on!
Why should you save up for a down payment?
Putting a down payment on your car will allow you to enjoy the following benefits:
- Improved loan approval chances
Several factors come into play before a bank approves your car loan application, such as your credit history and debt-to-income ratio. If you don't have a credit history demonstrating your responsible debt repayment, or if your monthly income doesn't meet the loan requirements, your willingness to put a down payment can boost your chances of getting the bank's approval.
- Lower interest rate
Banks usually apply higher interest rates to loans when there's a risk of the borrower not repaying. But a down payment can show the bank that you're a low-risk customer because you would need to borrow less money. By doing so, you reduce the bank's risks, which leads to the bank offering you a loan at a lower interest rate. The larger your down payment, the lower the interest rate you can secure. However, it's important to know that there can be exceptions to this rule. Some banks may not offer a lower interest rate even if you make a down payment, especially when the interest rate is already low.
- Lower monthly instalments
Paying more upfront means less to pay each month. Let's say you and your friend both got a car loan of 20,000 JOD with the same repayment period. But here's the difference: you made a down payment, and they didn't. As a result, the amount you owe will be lower than what your friend owes. This puts you in a better position with lower monthly instalments, while your friend will have to deal with higher monthly payments to clear their loan over the same period.
- Faster loan repayment
When you make a down payment, you're cutting down the total amount you owe. That means you won't have to extend the repayment period to lower your monthly instalments. For example, instead of an 8-year loan term, it could be 5 years. This way, you'll finish paying off your loan quicker. And here's an important reminder: the shorter the loan term, the less interest you'll pay.
What's the recommended down payment when buying a car?
The size of your down payment mainly depends on the price of the car that you want to buy. Generally, it’s recommended to put down 20% of a new car's price or 10% for used cars, or even more if you can manage it. But why does the down payment differ between new and used cars?
As you know, new cars cost more than used ones since they've never been driven. But here's something you may not know: the value of a new car starts to decrease the moment you drive it off the showroom floor. Why does this happen? Because it's no longer considered new! In fact, within the first year, a new car loses around 20% of its initial value.
Can you buy a car without a down payment?
The short answer is yes, you can if you don't have enough savings. But it's important to know that you will end up paying more in interest, facing larger monthly instalments, and the loan repayment period will be longer.
So, we advise you to either hold off on buying a car until you save enough for a down payment or pay as much as you can upfront. And when your financial situation improves, you can increase how much you pay in monthly instalments. By doing so, you'll be able to pay off your loan faster and pay less interest.
Now that you understand the importance of a down payment better, if you feel prepared to apply for a car loan, we're here to help! Learn more by clicking here.
Lifestyle
