The down payment is a concept many people ignore when purchasing a vehicle. This is unfortunate because making a down payment can have a significant impact on your monthly car loan payment. Depending on the length of the loan and the interest paid, making a down payment can literally save you thousands of dollars over the life of the loan. By truly understanding the down payment concept, and keeping the concept in mind, you will be far better equipped to make the best decision for yourself when determining the type of car you can afford.
There are a number of things to remember when considering just how making a down payment will impact your monthly auto loan payment. The first point to understand is that an up-front down payment reduces the overall size of your car loan. The more money you pay up-front, the less you will have to pay each month. This, in turn, reduces the amount of interest you will have to pay. Don’t make the same mistakes most people make – don’t let the “apparent size” of the numbers deceive you.
Another important point to remember is that the longer the term of your loan, the greater impact your down payment will have on the total amount of interest paid. The longer the payment period of a loan is, the more spread out the payments are. Don’t let yourself be fooled! Just because your down payment doesn’t reduce your monthly payment by a large amount does not mean it isn’t having a significant impact in the end! The reduction on a per-month basis seems smaller when the loan term is longer. This is because your interest savings are compounded over the term of the loan. That being said, it is important that you do your best to take on a smaller loan!
The interest rate is another important factor that has a significant impact on the down payment. The higher the interest rate you are paying on your auto loan, the greater an impact making a down payment will have. Reducing the loan amount when the interest rate is high will generate you greater savings over the length of the loan.
Always keep in mind the interest rate and length of the car loan when purchasing a new or used vehicle. By keeping these important points in mind, your “perspective’ will be different when car dealers try to add little extra “items” to the end of your car loan. Remember, small numbers, compounded over a long time, end up building large numbers. By simply making a down payment on your car loan, you can save a large amount of money by the end of the loan term.