There are many benefits to making a sizeable down payment on car loans. The more money you can put down up front, the less you will have to borrow. When your principal is made lower by a large down payment, you will pay less money in interest over the term of the loan. A large down payment can also get you out of upside down status sooner.
How Upside Down Happens
Being upside down on your car loan means that you owe more money on the car than it is actually worth. This is a normal occurrence in the early stages of the loan’s term. A car’s value depreciates quickly once you drive it off the lot. If you only pay 10% down, and the car loses 25% of its value in the first 6 months, it is easy to see how you can be upside down in a flash. As you make your monthly payments, it balances out, but if you are staying upside down for three or four years, that can be problematic.
Turning the Tables
The best way to move more quickly from being upside down to owing less than the car is worth is to make a large down payment. If you just put 5% down, you are barely covering the taxes and fees associated with the purchase. If, however, you can put down at least 20% of the purchase price, you should be outrunning your vehicle’s depreciation rate within two years or less (for a 4-year loan). Of course, if you can put even more than 20% down, that gets you into positive equity territory even faster.
Getting out of the upside down state can give you peace of mind when it comes to the overall value of your vehicle. If you can make a large down payment on your next car, you will be driving a vehicle that’s worth more than you owe on it in no time.