It’s always a good plan to set some money aside to use as a down payment when financing a new or “new to you” car. As a general rule, you’ll want to pay 20 percent of the vehicle’s value as a down payment for a new car and 10 percent as a down payment for a used vehicle. This makes tax season an excellent time to shop for a car and use your tax refund as part of your down payment.
Below, you’ll find five reasons using your tax refund as a down payment works in your favor.
1. Your Down Payment Helps Reduce Your Monthly Payments
The more money you put toward a down payment for your car, the lower your monthly payments will become. To illustrate how a larger down payment works in your favor, review the following example.
Assume you plan to purchase a vehicle for $25,000 and finance it for 60 months at 3% APR.
As you can see, larger down payments result in lower monthly payments. If you chose to put $5,000 down on your new car, your monthly payments would be $89.85 lower than if you put nothing down.
2. You Pay Less Interest on Your Vehicle
Continuing from the example above, you’ll notice that in addition to lower monthly payments, you’ll also pay less interest. Over the course of the 60-month term, you’d save $195.31 if you put 10 percent down or $390.61 with a 20 percent down payment.
3. You Build Equity in Your Vehicle
If you haven’t heard of depreciation just yet, it’s a word you’ll get to know in relation to cars. Vehicles depreciate remarkably fast. In fact, new cars lose approximately 20 to 25 percent of their value within the first year. Your down payment helps you build equity in your vehicle immediately, which is invaluable when the time comes to trade your car in.
4. Helps You Stay Above Water
When you are “underwater” on your car loan, it means you have negative equity. In other words, you owe more on the vehicle than its current value. Your down payment can help you avoid this situation by reducing the effect of depreciation on your car’s value.
For instance, if you're in an accident and your vehicle is totaled, the insurance company will pay you based on the value of the car – not how much you owe on the vehicle. That will leave you paying the balance out of pocket while shopping around for a new car. Your down payment can reduce the sting of depreciation by decreasing the amount of money you have to pay out should this situation occur.
5. It’s Easier to Get Approved for a Loan
Many lenders like to feel as though you have some “skin in the game” before extending credit. This is especially the case if you don’t have a long and strong credit history just yet. A substantial down payment shows them you’re serious about repaying your loan and makes lenders more likely to grant you approval for the loan.
We’re Here to Help!
Navigating your way through the car-buying process isn’t always as simple as finding the perfect vehicle. There are many financial considerations to understand and decisions to make along the way.
As your credit union, we’re here to help you make the smartest financial choices – and buying a car is no different. Our team will show you how various financing options impact your budget, monthly payments, and overall financial future.
If you’re ready to buy a new vehicle, give us a call at 202-479-2270 to get pre-approved today.