What is a down payment and how does it impact my loan?
Quick Answer
A down payment is the amount of money you pay upfront when purchasing a vehicle. It reduces the amount you need to finance and may affect your loan amount, monthly payment, and overall financing costs.
A down payment on a car is a percentage of the vehicle’s total cost that you pay at the time of purchase. The size of the down payment affects almost every aspect of the loan, such as the interest rate you’ll pay, the amount of your monthly payment, and the length of the loan. The larger a down payment, the more favorable the rest of the loan terms will be. This means that you will pay less for your car during the life of the loan than if you had made a smaller down payment.
A down payment can impact your auto loan by:
Reducing the amount financed:
A larger upfront payment means borrowing less money.
Lowering monthly payments:
Financing a smaller amount may reduce your monthly payment amount.
Potentially reducing interest costs:
Borrowing less may reduce the total interest paid over the life of the loan.
Changing loan terms:
Your down payment amount, credit profile, vehicle price, and lender requirements can all affect available financing options.