How Down Payment On A Used Car Works
What is a down payment and why is it necessary? When dealing with a loan for just about anything there is a certain amount of risk involved. There are several factors in determining the amount of risk. This risk results in a credit score and is determined mostly by credit history.
When you have bad credit history you become more high risk. This doesn’t make you a bad person. All it really means is that you’ve made some mistakes in the past. Schools don’t teach kids how to manage their finances so most don’t learn later in life until they make a mistake.
These mistakes such as missed payments, repossessions, bankruptcy or foreclosure go onto your bureau as credit history. It is looked upon negatively. Why? If you missed multiple smalls bills such as your cell phone, electricity or water then how’re you going to be able to handle a car payment? I’m not saying you won’t or you can’t but that’s how finance professionals look at it.
So in their eyes how can you prove that you can handle something as large as a car payment? If you have more money then that shows an ability to manage large sums of money. It shows a willingness to save money and a certain level of responsibility to be able to not spend it.
A larger down payment also helps you save money over the long run. Remember, when you buy a car you have to pay taxes. If you only put $500 then most of that will only take care of uncle Sam’s cut. The more money you put down up front the more it will lower your principal balance and your payments as well.
So in a sense a larger down payment is like a long term savings plan that you’ll see returns on immediately. Plenty of people would happily love to have an extra $50-$100 in their pockets every single month and that’s what a larger down payment can get you.
Down payments also psychologically bind you to the car loan. I’m not sure how or why this works but the more money you put down the less likely you’ll default on the car loan. There are plenty of people who would give up on a car if they only put $500 down. There are less so that would give up putting $2000 down. A $2000 loss hurts a lot more and takes a lot more time and energy to recover. So you’re also less likely to give up on a car loan because you’re cognizant of how much work went into that $2000.
If you have no credit or bad credit paying off a car loan can be the first step in either rebuilding your credit history or establishing credit. A higher credit score means you pay less interest on a loan and save a lot of money over the long run.