Down Payments and Loan Rates

What good does a down payment do you? You might have heard that it is very important, but why? In order to be successful with a down payment, you must know how to use it properly. The rate on a loan could determine its entire outcome, so make sure that you take your time and get it right. The right down payment could mean the difference between a manageable monthly car payment and repossession.

What Drives a Loan Rate Up?

You need to make your car payments on time. When you owe money to the dealer, they will want the money back by the agreed date. If you have proven that you can make payments as agreed, then you are not a risk. However, if you fail to make payments on time, the lender will charge you extra because of the higher risk you represent. Borrowers with poor credit also frequently end up with high interest rates for the same reason–risk.

How a Down Payment Factors In

Your down payment provides protection from high interest rates and default. If you have a low credit score, then you have to demonstrate your commitment to repaying the loan in another way. The larger your down payment is, the more seriously your lender will take you. When you have a large down payment, you show your lender that you have the ability to save and manage money, which means you are less of a risk. This is why you should take your time and make sure that your down payment is large enough to secure an ideal rate.

Knowing What They Want

Sometimes you do not even have to save for a long time in order to get a good down payment. All you really need to do is make sure that you know what your lender wants. If you comply with the dealer’s wishes, then that will help you secure the rate you want. A good rule of thumb is to try to put down as close to 20% of the car’s purchase price as you can.