Provided by AOL Autos
We
all know that a new car loses a significant amount of its value when
you drive it off the lot. That's where the down payment -- the amount
of cash you bring to the purchase -- comes in.
The down payment can demonstrate to a lender that you're willing to
make an investment in the deal, and perhaps gain a more favorable
interest rate. It also helps take some of the shock out of the instant
depreciation so you're not "upside down'' on your loan for years and
years.
Upside down
What's
it mean to be "upside down?'' You learned in an earlier chapter that
it's the industry term for a car owner who owes more on a vehicle than
it's worth. Almost every new car -- and most used-cars -- transactions
involve a period of being upside down on the loan. After all, if you
put 10 or even 20 percent down on a car and it depreciates 25 percent
in the first three months, you're upside down, at least for awhile.
But
where it gets worrisome is when the owner remains upside down three and
even four years into a loan. You've also seen earlier how some folks
make matters worse by rolling the old car's remaining debt into a new
loan. They're forced to pay interest and make payments on a car they
don't even own anymore. And tacking the extra debt on their new auto
loan puts them upside down all over again.
Up the down payment
How do you avoid that situation, aside from making the best initial
purchase deal possible and not rolling your old car's loan into the
deal?
Make a substantial down payment. These days, the average down payment
for an auto loan isn't much of a payment at all. A typical car buyer
puts just 5 percent down. That often doesn't even cover the cost of
sales tax and other fees, much less make a dent in the depreciation
factor.
If at all possible, a buyer should plan on putting down at least 20
percent of the purchase price. With that much down, a buyer should
begin to see positive equity about two years into a four-year loan,
assuming the vehicle's kept in good shape.
If you can't put down 20 percent, scrape up as much cash as you can and
keep the term of the loan as short as possible. You can use Bankrate's
auto loan calculator with amortization table to get the remaining
balance at any given point. Comparing that with the estimated value of
the car at the same point will tell you when you stop being "upside
down" in the loan. That calculator also has an "extra payment" feature
that will show you the impact it will have if you apply added sums
against the principal.
