What is More Important in Buying a Car, a Big Down Payment or a Low Interest Rate?


Down Payments and Interest Rates on Cars

Buying a car can be an exciting and enjoyable experience, doing research and being able to test-drive vehicles is something many Canadians enjoy. What most car buyers dread most is at the very end of the process, figuring out the logistics around paying for the vehicle. If you’re financing a car, you need to figure out what monthly payments you can afford. Two of the biggest factors that affect your monthly payments are the down payment you make and the interest rate on the loan. In this article, we’re going to talk about down payments and interest rates to give you a better understanding of what to do when you’re looking for a car loan.

What is a Down Payment?

A down payment is the amount of money you choose to pay upfront towards a car loan, hence reducing the amount you’ll borrow. Any time you get a car loan, you have to decide how much of a down payment you want to make. Sometimes dealerships will incentivize buyers through 0 down car loans, where the customer can get approved for a car loan without any down payment, but we typically recommend avoiding those. 

What is an Interest Rate?

An interest rate is essentially the cost of borrowing money from a lender. Banks and other lenders make their money off of interest rates. Typically, interest rates are expressed as a percentage.

What Affects the Interest Rate?

The interest rate you’re approved for is based entirely on the level of risk you pose to the lender of not paying back the loan. That level of risk is based on the borrower’s credit score. The higher the credit score, the more confidence the lender will have in your ability to repay the loan and therefore will lower the interest rate on the loan. If you have bad credit, the lender will have to increase the interest rate in order to make the risk of the loan worth it to them. 

What’s More Important: A Big Down Payment or Low-Interest Rate

This is a tough question to answer because there’s a stark difference between a down payment and an interest rate. That differences stems from the fact that you can choose your down payment, but your interest rate is determined by the lender. Ultimately, the goal should be to spend the minimum amount overall on a car while being able to keep up with the monthly payments. If you have great credit but not a lot of spare cash, it would mean opting for a smaller down payment with a lower interest rate and higher monthly payments due to it being a larger loan. If you have bad credit and a lot of spare cash, you’re going to want to put as much as you possible can as a down payment so you’re asking for less money to be leant, causing the interest rate to decrease. If you’re right in the middle, having average credit and some cash to put towards a down payment, you should make as large of a down payment as you can afford to make. This will both lower your monthly payments and interest rates because you’re asking the lender for a smaller loan. 

Advice for People With Bad Credit

If you’ve got bad credit and are looking to get a car loan, you don’t need to worry. Thousands of Canadians get approved for car loans with bad credit every year. A car loan is actually one of the best ways to improve your credit score if you can manage to consistently make your payments in full and on time. You may even be able to refinance your car loan at a better interest rate if you can keep on top of your payments for a year or so. 

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