What is a Down Payment?
The initial amount that is paid at the time of making a large purchase is known as down payment. This amount is usually paid by the customer using his or her savings. If the customer decides to finance his purchase via a car loan, the customer can pay part of the total price of the car directly to the seller while the rest of the money will be paid by the lending institution.
Do You Know The Impact of Credit Score on Your Down Payment?
The loan amount you are eligible for, the interest rate applicable on your loan, and hence the EMI of your loan is dependent on your credit score.
- With a 680+ Credit score – the bank or financier would be ready to waive your down payment without an increase interest rates.
- With subprime Credit scores such as those ranging between 580 and 680; the lender may waive the down payment, but you are sure to be stuck with a higher interest rate on the loan amount.
- Credit score below 580 may cause the lender to reject you altogether.
What are the Steps you Should Take When you need to Finance your Car Purchase
- Improving your credit score can qualify you for better loan terms – Steady job, regular income, stability, and good credit history implies the ability to meet financial commitments. Your first step should be to get your credit report and confirm its accuracy. Then, take steps to boost your credit score. Timely repayments, lowering your credit utilization rate, and building a respectable creditworth helps.
- Get a co-signer with good credit score – A family member or friend with a strong credit score agreeing to cosign the purchase contract would help improve your standing with the lender. Endorsement provided by such backing might get you out of the down payment. However, this might not lower your applicable interest significantly, lenders generally offer median range rate in such cases since they realize that the vehicle is for the person with lower credit score.
- Spend considerable time researching deals, dealers, and lenders – Being aware of the loan rate, terms and conditions will help you negotiate better. Research current auto loan rates online, and look for specialized online lenders that offer low-rate auto loans without down payment requirements. Visit dealerships to learn and compare existing financing options. Compare options offered by auto dealerships, local credit unions, banks, and alternative loan providers.
- Something is Better Than Nothing – Even a small down payment is better than zero — Cars depreciate fast. Having a large outstanding with high interest obligation can mean greater loss if the outstanding balance on the loan is more than the car’s resale value. Downpayment lowers your outstanding and hence your interest expense. It is thus prudent to wait and save enough for a handsome downpayment.
Are Low Downpayment or Zero Downpayment Ideal while Purchasing a Car?
With a good credit score, it is possible to buy a car with no down payment, but you run a higher risk having higher future obligations due to the steeper interest rates. Alternately, you can decide to purchase a car that does not stretch your budget, opt for an affordable used-vehicle or trade-in your existing car. Look for shorter tenure loans that are less than 72 to 84 months long, and avoid extras, such as extended warranties or credit life insurance, which may raise your overall payments.
If you can wait before you buy your car – do do. Use that time to save up for the down payment and to boost your credit score, so that you’ll qualify for more better loan terms.
For further guidance, feel free to reach out to our Debt Counsellors, we help you get better at credit management.
