Today I want to talk about a very specific topic about one of the most important purchases that you may do throughout your life: buy a car. Specifically I will analyze the importance of making the largest possible down payment , in case you are going to buy your car with a credit something, on the other hand, quite usual. And I realize that people are not fully aware of the importance of this point.
You can save a huge amount of money if you make a high down payment. You want to know why?
The importance of down payment to buy a car
Using a simple car loan calculator, like this one , you can see in detail everything that I am going to tell you throughout the article.
The down payment reduces the interest rate
If you make a good down payment you are telling the lender that you are a person who has enough financial means to buy that car and therefore the interest rate that will apply will be lower.
Use the calculator and look at the difference in the monthly fee between paying 1% or so. For a fixed rate of 7%, a loan of € 10,000 to be paid in 5 years, the fee is € 198, making a total of € 11,880.72 If it were 6% then the total would be € 11,599.68, a difference of € 281.04. Almost € 300.
A larger down payment reduces your monthly fee:
This means that you will have more free money each month for other expenses, during the life of the loan. Use the calculator again but now changing the amount of money you ask. In the first case we use the same example above, € 10,000 to be paid in 5 years with 7% interest, a total of € 11,880.72. Monthly fee of € 198.01 But if you now ask € 8,000 the monthly fee is € 158.41. Each month you will have € 50 plus what over the 5 years is an additional € 3,000 in your pocket.
A higher down payment means that the interest rate works for you:
Now you can deposit the money you have saved into a savings account. If you deposit the € 50 monthly, which you save in the previous step, in a savings account with a 2% return during the 5 years you are paying the loan you will generate € 3,152.37, that is, € 152.37 more than if you had left the money stopped.
That is, by making a down payment you not only save money but also earn more . And you can also use that extra money to pay off your loan, which will free you from debt, causing you to pay less interest. As you see making an initial payment as high as possible when you are going to buy a car it has numerous advantages. I encourage you to at least make a down payment of 20% of the purchase value of the car. That is, if the car is worth € 20,000, make a down payment of € 4,000 so you will request a loan of € 16,000.
For example, for a loan of € 20,000 at 6% interest for 5 years, each 1% down payment is € 3.87 less on your monthly installment and a saving of € 32.20 on interest payments each month.
Therefore, try to make the highest down payment you can since the benefits are extraordinary.