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Understanding Down Payments

Written By, NowCar Team

Understanding Down Payments

Before you buy a new car online, it's a great idea to educate yourself in order to understand all the nuances of the purchasing process. For example, we've all heard of down payments, but how well do you know the details of a down payment actually involves?

Read on for some guiding principles and learn how to make the most of your down payment and drive away with the best possible deal.

Down Payments 101

A down payment on a car is the amount of money you can spend up front, it is the sum you are willing to part with on the day you make the purchase.

The harsh reality of purchasing a new car exists in the form of depreciation. When you buy new, the car immediately loses value almost as soon as your turn the key in the ignition.

Making a significant down payment can help mitigate the sting of depreciation. So what is considered a significant down payment? How much should you put down up front? You might be surprised to learn that most consumers only put down an estimated five percent of the vehicle's total cost. Now, when you consider factors like taxes, fees, and any added features, five percent doesn't necessarily even impact the car's impending depreciation.

Depending on your own personal financial reality, you should plan to aim for twenty percent of the price tag. If you can manage this, your vehicle will represent positive equity in approximately two years of a four-year loan term, as long as you maintain the car per the manufacturer's recommended service schedule, of course.

In the event that a twenty percent down payment is too much for your budget to handle right now, determine how much you can spend up front and try to make that percentage as high as possible. You'll also want to negotiate for the shortest loan term you can realistically manage.

Doing this will likely help you avoid finding yourself "upside down" on your auto loan. What does it mean to be "upside down" on an auto loan? Simply that you owe more on your vehicle than the vehicle is actually worth. Now, in most cases, all consumers will technically be "upside  down" on their loan at some point, given that most cars depreciate up to twenty-five percent over the course of their first three months on the road. This holds true even if you've put twenty percent of the total cost into your down payment.

However, having made a considerable down payment initially will significantly shorten the amount of time your loan is upside down. For example, only two years versus longer, or for the duration or beyond of a four-year loan.

Whenever possible, avoid rolling any leftover debt from your last car into your new car loan. Doing so just prolongs the time you spend upside down and increases your debt overall.

Before you buy your car online, review your finances and determine the healthiest down payment you can make in order to secure a better purchase deal.