A down payment on cars refers to the initial sum of money applied to a purchase being financed by the purchaser. When making a large purchase, many buyers will pay some of that cost upfront in the form of a down payment in order to reduce the amount of money to be financed. Other buyers, however, may choose to finance an entire purchase without putting any money down at the time of purchase. Some lenders, though, require a down payment, which may or may not be relative to the purchase price of the vehicle - that is, a certain percentage of the total cost. Down payments are one of many factors that can affect the loan rate you receive and your monthly payment.
Down payments Loan to Value ratio
From the perspective of a lender, deciding on an appropriate interest rate for a given borrower generally boils down to an evaluation of the amount of risk associated with lending to that borrower. The factors that influence this assessment vary by lender, but one of the factors is known as LTV. LTV is short for Loan to Value ratio and is calculated by dividing the loan amount by the value of the vehicle.
The higher the ratio, the more risk the lender will take on by providing the loan, and to cover this risk some lenders will safeguard against potential losses by charging you more in interest.
Is a small or large down payment on cars best?
A great way to minimize your financial burden in the long run is to put as much as possible down on the car that you’re buying. The rule-of-thumb is to put down at least 20% of the ACV (actual cash value) of the car, but the actual number most people put down is only about 12%.1
Putting a low amount down can have its advantages, some of which include:
- More cash in your pocket now
- Not having to save for months in advance
Putting nothing or very little down can seem like the better choice, but over the life of the loan a low down payment is going to cost you more in interest than it would have if you increased your down payment. A few advantages to putting more money down on a car are:
- Less money paid on the car over the life of the loan
- More equity in the car
- Paying off the car faster
- A lower LTV ratio, which could mean a lower interest rate
There are advantages to making a small down payment, but if you’re looking at the big picture, those advantages are far overshadowed by the benefits of making a larger down payment.
While a smaller down payment puts more money in your pocket now, a larger down payment will put much more money in your pocket in the future. Making a larger down payment may not be as immediately satisfying as making a small down payment, but doing so can help you feel comfort in knowing that more of your money is going to the car itself.