Cars: Lower Down Payment or Lower Interest?

 More lenders than ever are allowing customers to purchase automobiles with no down payment. In fact, it is not uncommon to hear car dealers offering this option to buyers. Fortunately, consumers are becoming more aware of the reasons to purchase a car with a larger down payment (or pay cash when possible). Today, interest rates are low with high-quality borrowers (e.g., those with a credit rating of 720 or higher) the option to purchase their vehicle with no money down and rates as low as 3.54 percent for three-year loans and 3.74 percent for as many as five years.

Automobile prices however, seem to be heading up meaning that if you are purchasing a vehicle with no money down, there is a good chance you are going to be paying $20,000 or more for a new car. Here is how your down payment can make a difference with a new car loan:

3-year loan - Auto Loan Amount: $25,000 - Interest Rate 3.54 percent - Monthly payment: $732.99: Over the course of the loan (e.g., 36 months), your new car will cost you $26,387.64. This figure does not represent your automobile purchase taxes, licensing and registration, or automobile insurance

5-year loan - Auto Loan Amount $25,000 - Interest Rate 3.74 percent - Monthly payment: $457.48: This option may initially be very appealing to a new car buyer. After all, the same car is costing almost $300 a month less than the same loan at a slightly lower rate. Not so fast, because over the course of this loan (60 months), you will pay $27,448.80; nearly $2,000 more in additional payments than the lesser term. In addition, this reflects a nearly $2,500 increase over the purchase price.

Considering your down payment

Making a down payment should mean reviewing the overall changes in your monthly payments as well as the "final" cost of purchasing your vehicle. Using the exact same numbers as listed above and showing a $2,500 down payment here is the difference in your final cost:

3-year loan - Auto Loan Amount: $22,500 - Interest Rate 3.54 percent - Monthly payment: $659.69: Over the course of the loan, your new car payments will add up to $23,748.84. This means that if you add your down payment, you'll be paying $26,248.84

5-year loan - Auto Loan Amount $22,500 - Interest Rate 3.74 percent - Monthly payment: $411.73: Again, this option looks more appealing to a new car buyer. After all, the same car is costing almost $160 a month less than the same loan at a slightly lower rate. Over the five years you are paying this loan, you will wind up making $24,703.80 in car payments. When you add your down payment ($2,500) you have purchased a $25,000 vehicle for $27,203.80.

 The above scenario is for a borrower who has perfect credit. For those who have a credit rating that is better than 630 but lower than 669, most banks will require that you place a down payment of at least 15% of your purchase price. However, the pain does not end there. Let's take the same assumptions as listed above (purchase price of $25,000) and do the calculations based on a three-year and five-year loan. This formula requires the 15 percent down payment or $3,750.

3-year loan - Auto Loan Amount: $21,250 - Interest Rate 7.95 percent - Monthly payment: $665.40: Over the course of the loan, your new car payments will add up to $23,954.40. This means that if you add your down payment, you'll be paying $27,704.40. This is significantly more than if you (a) had better credit or (b) paid cash for your automobile.

5-year loan- Auto Loan Amount $21,250 - Interest Rate 8.04 percent - Monthly payment: $431.28: Again, this option looks more appealing since the monthly payment is significantly lower. However, over 60 months that $234.12 is going to cost you plenty. Your $25,000 car is going to cost you $29,626.80.

It is tempting to buy a new car with a low down payment; after all, we see advertisements everywhere and they are tempting. Safety is a significant concern with older vehicles as is the cost to maintain them. However, these samples should clearly reflect that your down payment and your interest rates do matter when you are considering a new car.

Cars depreciate more rapidly than most other property. In fact, your car loses thousands of dollars in value the minute you drive it off the dealer's lot. On average, cars lose in the area of 15 and 20 percent annually. In addition to this, your insurance company will play a role in new car costs. Insurance is generally higher on new cars since they are at greater risk of being stolen. Chances are that your finance company will want you to keep a larger policy until such time as you have paid off the loan.

The costs of buying a new car are steep and your down payment as well as your interest rate will play a role in your final decision to purchase. Remember to use this handy checklist when considering a new car:

• Credit Rating Matters - you can request your free credit report annually from the three major credit bureaus
• Insurance Costs - contact your insurance company and find out what additional coverage you may need and the cost
• Use a payment calculator - to determine your monthly auto payments

Remember, the larger your down payment, the better your credit rating, the better deal that your new car purchase will turn out to be for you and for your financial health.