A new car
loses a lot of its value the minute that you drive off of the lot. Your
down payment helps in balancing out this loss.
Down payments also demonstrate to the lender that you
are willing to invest your money into the deal. They help you get a better
interest rate. It will also help you from being upside down in your loan.
Being upside down means
that you owe more for the vehicle than it is worth. Almost every new car
purchase involves you being upside down for some period in the loan. For
example, even if you put 20% down on a car, when it depreciates 25% in the
first three months, you are then upside down for a while.
It's not that much of a
worry, unless you are upside down for years.
Many people compound the
problem by rolling their trade in's remaining debt into their new car
loan. They will pay interest and make payments on a car they no longer
own. Taking extra debt on a new auto loan makes it upside down for even
longer.
How can you avoid being upside
down?
Make a substantial down
payment upon financing the vehicle.
Most people don't make a
very large down payment. The typical car purchase is with a 5% down. This
won't even cover sales tax and other fees, much less cover the
depreciation.
You should try to put at
least 20% down on a new vehicle. With that much down on a four year loan,
you will begin to see positive equity in two years.
If you can't afford 20%,
put as much as you can down and keep the term length as short as
possible.
