When people go to buy a car, there is always the matter of the down payment to settle, like how much should one put down. Some wonder how much is appropriate, but in reality the answer is as much as humanly possible.
No appreciation for depreciation
When buying a car, many people have a bit of savings or a trade-in vehicle to use as a down payment on the vehicle they wish to buy. This helps secure a loan for the car, as well as cushioning the balance of the loan.
The rule of thumb, according to Edmunds, also quoted by CBS, is a down payment of 20 percent. The national average is about 11 percent. A benefit, according to CBS, is that the down payment absorbs much of the first-year depreciation, which Edmunds pegs at 19 percent for the first year, including 11 percent once driven off the lot.
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CBS, Edmunds and also a post on About.com, all stress doing whatever is possible to counteract the depreciation so not to go into negative equity with the car loan. Also called being “upside-down” or “underwater,” negative equity is when an asset, purchased with a loan, is worth less than the loan balance.
Negative equity all but assured
CBS points out that if the car is totaled driving off the lot, the owner would be on the hook for more than the car is worth. However, “negative equity” is slightly bogus as a primary reason for a larger down payment.
Cars are, in reality, terrible assets from a financial standpoint. Aside from from rare and already highly-desirable cars, they only decline in value; Edmunds estimates a car loses 63 percent of its value in five years of ownership. Once one includes licensing fees, insurance, fuel and the costs of maintenance, a car is a worse soak than a house. Breaking even is not an option; the best one can hope for is to minimize the loss.
However, there is a basic reason to maximize the down payment. It saves money in the long run.
More upfront means less over time
The trick to saving money is to pay less. The more is paid upfront, the less paid over time. Numerous websites, such as Kelly Blue Book, have car payment calculators which easily demonstrate the effect more money down has on lowering payments.
Using KBB’s loan calculator, a $20,000 loan, at 3.29 percent APR for 60 months and with 8 percent sales tax, will have monthly payments of $390.91 with no down payment or trade-in. A down payment of 20 percent lowers the payment to $354.72 per month, a savings of $2,171.40 over the lifetime of the loan.
A further 1 percent down, $2,200, lowers the monthly payment by $3.62. Over 60 months, that’s $217.20 less one has to pay.
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