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Is there an ideal amount for a down payment on a car?

Is there an ideal amount for a down payment on a car?

Given the amount of money involved in the average new car purchase, it’s no wonder many people try to lower their car loan by as much as possible. A key way to do that is by putting down a large down payment.

But is there a magic number? Is there such a thing as too large down payment?

Car loans and down payments

The most popular car loan configuration is the down payment and/or trade-in with the loan covering the balance. While you can get no money down car loans, using a deposit of some kind is by far the most popular form of car loan.

For some, the amount you have as a down payment can make the difference between being accepted for a car loan and not.

A down payment can help car buyers in three ways:

  • Lowers the loan amount – The more you can afford to put down as a deposit will lower the overall amount of the loan you’ll need.
  • Lowers your debt to income ratio – The higher the down payment, the lower the loan amount. If you’re getting close to your borrowing limit, this can help.
  • Improves the chances of loan acceptance – Borrowing less and using less of your debt to income ratio can be the difference between being accepted for the loan and not.

These are three good reasons why we recommend using down payments wherever possible.

Why lenders like down payments

Aside for the reasons above, lenders like down payments because they lower the potential risk of providing the car loan.

The more you put down as a deposit, the lower the potential for loss for that lender. As you lose any down payment you make if you default on the loan, the lender would lose less as a result. This makes them more amenable to lending to you.

You may even get a better rate as a result!

How much is ideal for a down payment?

There is no magic number for a down payment but the more the better. With one caveat. Don’t use up all your savings for a deposit on a new car as it could leave you exposed.

The norm is between 10% and 20% of the total value of the car but you can exceed this by any amount you like.

The more you can afford to put down, the lower the amount of the loan. This makes the loan more affordable and lenders more likely to accept the application. Both work in your favour.

For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!

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