BLOG: How Does Down Payment Affect Your Loan?
What Is Down Payment?
Whenever you’re purchasing something that you plan on financing, and making payments to, the initial payment you make toward your purchase is considered “down.” The remainder is what you’ll be financing. What is this and why does it matter?
Let’s say you’re purchasing a vehicle for $20,000 in the state of Texas. You have to remember, state tax is going to be $1250, and the rest of the title and licensing fees are going to be around $350. So, for this example, you have $1250 and $350 which equals $1600. So, now your loan is going to jump to $21,000! Or, you could put the $1600 down in order to keep your payments low, and the loan exactly at the $20,000 mark.
What Are Some Of The Reasons This Matters?
First and foremost, payment. Payment is going to be about $30 lower every single month, on average, if you put that $1600 down. So, it is beneficial for you as a consumer because you aren’t paying finance charges on that $1600. Your $1600 would become well over $2,000 if you chose to wrap it in the loan and finance it. So, a larger down payment makes your monthly payments cheaper for you.** There’s more to this, later.
Sometimes, when lenders value the vehicle, they do not include tax, title, and license. Some of them will give you the full $20k, but you have to pay the tax title and license just to get the loan financed.
When it comes to selling or trading out of your vehicle, the average trade cycle is 34 months. If you owe an additional $2k, now you’re going to have to keep your car for 40 months as opposed to 34 like the average consumer, because the market value will be less than the amount that you owe. (More on negative equity in another blog!)
Another reason why a down payment is best for you is that you pay less in interest. The overall COST of the loan to you will be less because you’re not paying an additional $1600 (plus interest!) back to the bank. If you’re at a higher interest rate, this could be substantially more than you had originally hoped to spend.
If you choose to participate in the equity of the loan, when purchasing it, this will open up your options when it comes to financing, exponentially. Lenders want to see someone who takes accountability for their situation. Someone who understands that they need to help with the equity. If you can show them that you’re willing to help, they will fight to help get you your loan. So, now, instead of you being the one asking for a favor from the bank, you’re the one who gets to decide who you want to do business with. You’re in charge. You have the power. It is much better when asking for a loan to have 10 lenders to look at your application seriously than to only have 1 lender. The more money you put down, the more lenders you’ll have wanting to fight to capture your business.
Putting It Down Later.
We all know that there are certain situations where you have to move, now. Maybe you need a car immediately and don’t have money to put down. Those situations happen, and those are fine. If you want to get yourself back into a good position on the loan, you can do it later. The way you do that is by sending the bank a separate check that reads, “Apply to principle only.” This will not lower your monthly payments, but it will get you back into the good trade cycle and back into positive equity. It will satisfy your loan with the bank a lot faster than simply making the monthly payment.
As always, you can always ask us questions for more clarification. In summary, the benefits of down payments are substantial in every aspect of financing, whether that be houses, boats, cars, etc. Though it can’t be done every time, it should be something to strive for. Remember to always talk over your options with your salesperson and ask the right questions. We have seen countless examples of people being able to take advantage of the loan for the vehicle they really wanted, and the down payment would have been less than $100. So, don’t be afraid of a down payment. Understand what it is, and how you can affect it.