The Right Downpayment Amount on a Car

The Right Downpayment Amount on a Car

Introduction

So, you’ve decided to take the plunge and buy that new car you’ve always dreamed about. You’ve found the right vehicle for you. You can’t wait to get home and show it off to all the friends and family. For most of us, buying a car is an important decision and one of the biggest you make in a lifetime. Many people can’t afford to buy a vehicle outright and need to resort to some sort of financing option. 

 

It’s common to feel jittery when the time finally comes to pay for the thing, not to mention all the forms you need to fill in. You’re sweating, the bank account is in retreat, your cheque book is hiding, and your parents have moved home without telling you. The new car is still winking at you from the forecourt, and irrational thoughts start to creep into your mind. When you are put under pressure and nervous and with the salesman pushing for an answer, please don’t just blurt out an arbitrary number. How much you decide to put down as an initial downpayment is an essential factor and will ultimately impact your bad credit car loan deal and how much you have to pay back. 

 

The amount you are likely to pay back over the term of the loan is directly linked to the amount you put down as an initial payment — the bigger the sum, the smaller the monthly payments and the less interest you have to pay. It’s safe to say that the more you can afford at this stage entitles you to more options and ultimately a better deal. Some lenders even have special rates for people who are willing to put more than usual down as a principal. It shows the lender you are committed to the purchase.

 

The Importance of the Downpayment

Before we jump into our valuable guide, it’s crucial that you have planned for this purchase before ever entering the dealership. Most people do not have a substantial sum burning a hole in their pockets. It will require diligence and patience and a lot of discipline to save up a sizeable chunk. That being said, isn’t it better to keep on saving and wait until you have that extra money to reach the next price point to save you more in interest payments? I certainly think so. It’s better to save and plan thoroughly as opposed to closing your eyes and hoping your savings will last. 

 

If you get halfway through a car loan and realise you can’t afford it, the penalties are eye-watering. It will leave a black mark against your name and ruin credit score and will make it so much harder to obtain credit in the future. Not to mention the dent in your pride when they tow away your pride and joy in front of the neighbours. Be responsible and have a backup plan. Prepare for the worst because sometimes life has a funny habit of throwing curveballs your way. Putting down a larger downpayment is like having a safety net.

 

The Odds Are in Your Favour

 

Somebody revealing a suited Ace & King in a game of poker

 

 

In some cases, if you’re having financial difficulties or a temporary slump in your cash flow, most lenders can be quite accommodating. A lender would want you to pay in full rather than having to go to the expense of repossessing the vehicle. Sometimes a phone call is all you need to ask them t

 

o give you a payment break for a few months until you get back on your feet. That would only be possible if you paid a significant deposit upfront. Lenders continuously weigh up the risk to themselves, and the likelihood of receiving their payments. It’s entirely up to you how much pressure you wish to place on yourself throughout this commitment.

 

There is far too much information out there, and it’s easy to become lost in the minefield when considering your options.

 

All this talk of deals and money can be intimidating, but luckily we are here in your corner to help you decide the right downpayment for your car. We have put together this guide to help you navigate some of the common pitfalls. It’s up to you to save the cash needed, let us tell you what you need to do with it.

 

How You Can Lower Your Monthly Payments

Your downpayment affects the monthly payments you will continue to pay throughout the lifetime of the deal. The more considerable the initial amount, the smaller the monthly payments will be and vice versa. It’s clearly in your interest to put down as big a sum as possible. When planning your purchase do some calculations at different price points. That will enable you to see how the initial deposit affects your payment schedule. Don’t take on more significant liabilities if you don’t necessarily have to. The more you borrow, the more interest you will have to pay.

 

For any downpayment on a bad credit car loan, it’s going to be important to understand exactly how it’ll affect your monthly payments. Indeed, this will go a long way towards making sure that you can, in the end, settle on the correct amount for the downpayment in the first place. Even if you are trying to pursue financing for a car loan with a bad credit score, it’s vital that you estimate the size of the downpayment as well as you possibly can in order to safely plan for the financial future you have ahead. 

 

By lowering your monthly payments, you’re giving yourself the best shot at paying back the loan in full and on time. As well as working to help out with the stress levels you’re undoubtedly experiencing, this will actually go further — paying back commitments in this manner is the best way to repair your own FICO score. To that end, working out the ideal downpayment amount for a bad credit car loan can actually do a lot for you in terms of getting your credit score back to where you want it to be. For that reason alone, it’s vital that you don’t lowball your downpayment figure. If things are tight financially, it’s totally normal to want to keep any bulk payments as low as possible, but this could do more harm than good when it comes to getting a bad credit car loan.

 

Steer Clear of Negative Equity

Another problem you want to avoid is a nasty little thing called negative equity.

 

Negative equity or ‘going underwater’ as you may have heard it termed is where you owe more in loan payments than the car is actually worth. Unless it’s a collector’s item, most cars depreciate in value quickly. When this happens with a vehicle that was purchased with a loan, it opens you up to the possibility of negative equity. What this basically means is, if you buy a car and crash it, 16 months after purchase and the vehicle is priced at $5000 by the underwriters. However, you still owe $8000 in loan payments (interest kills), in this scenario your insurance company will pay you $5000, and you will still owe $3000 to the provider of the loan. 

 

You never want to be in a situation where you’re paying payments on a bad credit car loan for a vehicle you no longer own. One way to avoid this is by paying a more significant downpayment. When you do this, you borrow less, and it brings down the interest payments dramatically. A more substantial downpayment will always keep you ahead of the negative equity curve. If this all sounds a little complicated, don’t fear — all of us have been terrified by the term ‘negative equity’ at one point or another. However, the colossal potential downside that is negative equity itself can be negated in part by a correctly-sized downpayment, so even on a bad credit car loan you’ve got a chance of making sure your finances tend towards the black rather than the red.

 

What LTV Is and Why it Matters

A fraction represents the loan to value ratio. Meaning how much money you laid down as a percentage of the loan. The bigger deposit made by the customer means a smaller loan is needed to finance the rest of the purchase. The benefits of a low LTV ratio are lesser monthly payments, better interest rates and shorter loan periods. All of these factors are advantageous when trying to ensure the loan value is falling quicker than the value of the car.

 

As a rule of thumb, the downpayment should be approximately 20% of the value of the car when new. This can be hard to work out on your own, especially if you’re not a car expert. That’s why we recommend doing your own research on the model you’re looking at, whether that takes the form of some extensive googling or whether it looks more like talking with somebody you know who understands bad credit car loans and everything they entail.

 

We’re wary about even mentioning a hard figure like 20%, because it can lead people into thinking of that figure as a kind of guide. They may even turn away from other bad credit car loan deals because the value is a little over or a little below 20%. The reality of the matter is that you’re the only person who understands your own personal situation well enough to figure out how close to that 20% number you should aim for. There are a few different ways to figure out how much the vehicle you’re considering would be worth new, but the best is probably to check out internet forums and message boards.

 

Where to Find Information

The problem with talking to car salespeople or similar professionals is that, more often than not, they have a vested interest in you making one decision or another. This isn’t to say that they’d ever mislead you — it’s just to point out that they’re not exactly an unbiased source, unlike people who have been in your exact situation and have no interest in which decision you make. Pay special attention to other people who have experience with bad credit car loans, and you won’t go too far wrong.

 

Putting down a bigger deposit may actually help you secure credit for the rest of the sum needed to purchase your vehicle. For example, a bigger deposit will show lenders you are serious about making the purchase, and they are more likely to lend against that risk. The less money you need to borrow is better for all kinds of reasons.

 

It may seem complicated, but some simple arithmetic can dramatically lower the risk of a bad deal. With so many products and services to choose from its easy to become bewildered. Pay as much as you can comfortably afford and lower the loan amount to its absolute minimum. By reducing the risk and worry, you’re better able to enjoy your new car.

 

Conclusion

In the end, the downpayment amount you’ll pay for a bad credit car loan is going to come down to personal preference. Hopefully, though, by making use of this guide and regularly checking it, you’ll be giving yourself the best chance at understanding the process more thoroughly and figuring out exactly which downpayment amount is right for you, considering your own financial situation and the health of your credit score, as well as your LTV ratio and the value of the model itself.

 

It can sometimes be difficult to obtain approval for a car loan, especially if you have a bad credit score. Here at carloans.ca, we do not prioritise customers with less than ideal credit scores. We understand that everybody’s circumstances are different and each application is considered on its own merits, so if you’ve been having difficulty, please send us an email or give us a call. We are happy to help.

Get Your Car Loan Approval

Related Articles

Apply for your Car Loan

Apply Now and Experience a Whole New Way to Buy a Car

Apply Now