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.
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