Should You Make a Down Payment on a Car Loan?
When you’re in the process of buying a car, you’re going to need to make a lot of important decisions. If you’ve chosen the route of financing, one of those decisions is going to be if you’re going to put a down payment on the loan and how much you want to put down. Unlike mortgages, you’re able to get a car loan without paying a dime upfront. While there are some disadvantages to skipping a down payment on a used car, there may be a few reasons why it makes sense for you to pay nothing upfront. Most Canadian lenders are willing to approve loans without down payments so long as the borrower has good credit. But should you really skip a down payment on a used car if you’re able to make one? In this article, we’re going to cover the advantages and disadvantages of both options.
You Do Have a Choice
Many Canadians are under the impression that if they want to get a car loan, they need to put a down payment, but this is untrue. While lenders definitely prefer to have a down payment on the loans they approve, they will still approve loans without a down payment. The reason they prefer it is because it lessens the amount of money they’re lending and in turn, decreasing their financial risk. Because it’s all about the level of risk for the lender, the better credit that the borrower has, the more likely that they’ll be approved for that loan without a down payment. If the borrower has bad credit, they will likely struggle to find a lender willing to offer them a 0 down car loan and if they do, it will come with a high-interest rate.
Why Skip a Down Payment on a Car?
So why would someone decide to skip on a down payment? Well, there are a few reasons. First, the person may need to get behind the wheel of a car as soon as possible and don’t have the means to make a down payment. While this will likely result in a higher interest rate, the bottom line is that they didn’t need to wait to buy the car. The second reason someone would skip a down payment is to free up money for other expenses or debts. While this can be a risky reason to skip, if you have money coming down the road, it could be a good strategy to get your finances in order. But if you’re not responsible with the extra money you freed up from skipping on a down payment, it can really hurt you financially.
Why You Should Make a Down Payment on a Car
There are certainly some negatives to skipping a down payment, you will want to take the following into consideration:
Depreciation: If you are buying a new car, it will depreciate even more rapidly. If you skip your down payment, this could result in you owing more money than the car’s total value.
Selling the car: If you decide in the future to sell your car before the loan has been fully paid off you’ll have to pay out of pocket to sell or trade-in the car.
Higher monthly payments: If you skip a down payment, you’re going to have higher monthly payments because you’ve asked the lender for more money.
Higher interest rates: Similar to the consideration above, not making a down payment means your asking for more money from the lender, increasing the risk for the lender. If the lender feels like it’s a bigger risk for them to loan money, they’ll increase the interest rate on the loan.
Looking to Buy a Car?
Whether you decide to take a 0 down car loan or make a down payment, it’s important you weigh the pros and cons before you make a decision. A great tool you can use to see how a down payment will affect your monthly payment is using a car loan calculator. Once you’ve decided how you want to finance your vehicle, fill out our short application and get approved for a loan in minutes!