Instability in the banking industry has led to tighter restrictions on money lending and many potential car buyers are feeling the pinch when they apply for an auto loan. Many lenders are increasing the amount of money the consumer is required to invest – the down payment.
A larger down payment can put a damper on making car purchase plans, but there are ways to handle this challenge. Down payments are not a bad thing by any means. There are benefits to investing in the vehicle you finance. Here are a few ways a down payment can help you . . .
First, it could mean lower interest rates. When financing a purchase, the lender is assuming the risk that you will pay the note in a timely manner. When you put money down, lenders feel like you are sharing some of this risk with them. In turn, sometimes they will offer a lower interest rate when the consumer personally invests in the purchase. Just a single point of interest can save you hundreds of dollars over the life of the loan.
Next, it could mean lower payments. Consider the math behind financing, if you finance less, then your payments will be less every month. So, a few hundred dollars down can save you money in interest. With enough money down, some people can even shorten the term of the loan, allowing them to pay off the note much earlier while keeping their payments in a manageable price range.
Also, more down means more equity. As we all know, automobiles depreciate - sometimes at an alarming rate. Most of us have heard one of our friends (or ourselves) regret that they are “upside down” in their automobile. The term “upside down” means the money owed on the vehicle is greater than the market price of the vehicle. This can create many problems when trading or selling an automobile.
One way to combat this is to invest funds at the time of purchase to stay ahead of depreciation. This can have many long-term benefits. Once equity is built in the vehicle, that equity can sometimes be used as a future down payment, lowering what is required for your next purchase.
All in all, the lender's restrictions may be inconvenient. However, by offering a larger down payment, you can potentially help yourself into a better financial position.
Source: Bob Hurley Ford
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