So you’ve finally decided to go all the way and buy a car. First of all, congratulations! The first car you purchase is one of those milestones each of us can’t help but remember. The freedom that came attached to the price; the unrivalled convenience; the pure fun of driving. And while the first car you ever buy is especially memorable, that’s not to say that the excitement factor diminishes at all when it comes to the later vehicles you’ll subsequently buy. It’s always a rush, from the first moment you decide you’re going to take the plunge right up until the time you get your signature down onto that famous dotted line.
But whether it’s your first automobile purchase or your fifth, odds are you’re going to need some way to finance the vehicle. There are few indeed among us who can save up enough cash to buy the whole thing up front, so the purchase is going to necessitate a payment plan. The most common way to go about this is to pay a certain amount of cash upfront, and then pay the rest off in monthly instalments, typically for 48 months but often up to 60 and beyond.
What Is A Downpayment, Anyway?
That first amount you fork over is known technically as a downpayment, and it’s an important part of the whole package. After all, the size of the downpayment you’re able to produce is inversely proportional to the size of the rest of the loan; that is, the larger the down payment, the smaller, relatively, the monthly instalments will be. To that end, it’s clearly important to be able to put up enough of a down payment that you won’t worry about paying off the rest of the car loan.
Which is all great, but how exactly does one go about saving up a downpayment for their car loan? It’s not always as simple as throwing a few cents into a jar every time you pass by the bathroom. The size of these payments is more often than not too considerable to be something you’ll be able to save up by keeping it in the back of your head. To put it more simply—the downpayment is going to be sizeable. No matter how big it actually turns out to be, it’s not something you’re going to be able to produce off the cuff.
The internet is awash with all kinds of information on how to go about saving up a downpayment for a car loan, and to the most initiated among us the wealth of data available can seem intimidating. Frightening, even. And for every one of us who know exactly what they’re doing, there are a dozen more who are only just starting out on their car loaning journey and are finding themselves stuck in this colossal avalanche of information.
That’s why here at Hamiltonbadcreditcarloans.ca we’ve put together a comprehensive list of everything you need to know. The goal is that by the end of this article, you’ll have enough info under your belt to prepare yourself to save up sufficient amounts of cash that are required for a big enough down payment. We’ve split the process up into a few easy-to-follow guidelines—while they won’t do the trick on their own (naturally, you’ll have to put in the work yourself) they will certainly provide an appreciable foundation for you to build the rest of your budget on top of.
To that end, let’s get straight to it.
Here’s The Ultimate Guide To Saving A Downpayment For A Car Loan
First of all, let’s highlight just how important it is to come up with a downpayment as part of your financing strategy for the car loan you’re looking at. The most important thing you want to avoid, when you’re purchasing a car, is to go ‘underwater.’ This is a common piece of lingo which effectively means ending up in a situation where you owe more on the loan than the value of the car is worth.
Sounds ridiculous, right? You may be thinking `How on earth could anybody wind up paying more for a loan than the car is even worth?’
Well, you’d be half-right and half-wrong. It is indeed ridiculous to think of paying more on a car loan than the machine itself (which, after all, the loan is paying for) would fetch you at market prices. But unfortunately this is an all-too-common pitfall many new buyers can fall into, often without even being aware of the risks involved.
A more technical term for the situation is negative equity. Whether it’s your car loan or the mortgage on your house, negative equity will mean that if your car is stolen, wrecked, or you need to sell it for some other reason, you’re still going to have to fork over the cash for the monthly payments in accordance with the financing scheme you signed up to in the first place. And the less the car is worth, the less your insurance is going to pay in order to cover the cost—whether it’s an accident or the case of your being a victim of theft, the result is the same.
So you’d effectively wind up paying full price for a car you no longer even own. This is, obviously, a terrible situation, and we’d hate to see you wind up in this kind of car loan scenario.
So how can a larger down payment help offset the risk of falling into negative equity?
Loan To Value Ratio
For one thing, a down payment reduces the all-too-important loan to value ratio. This figure is represented as a fraction, with the numerator being how much of the loan you owe and the denominator standing in for the total value of the vehicle. The lower your loan to value ratio is, the better your overall car loan deal is likely to be. This could manifest in a number of different ways: just a few among them are lower monthly payments, a shorter loan term (we’ll get to why that’s important and desirable in a minute), or even a better overall interest rate, which is going to prevent you paying more than you absolutely have to. After all, the money you pay in interest doesn’t go towards the value of the car. It’s a way for the dealer to offset the risk of lending someone money—think of it as a fail-safe, and you’ll understand why it’s in your interest (please excuse the pun) to keep this number as low as possible.
Okay—a downpayment can help create a more favourable loan to value ratio. The more you pay up front, the comparatively less the rest of the deal is going to wind up costing you. And to speak frankly about it, the most common way this comes about is by creating a shorter-term loan in total for you to be shackled by. But what’s so much better about a shorter term loan?
Shorter Vs. Longer Term Loans
The shorter the time you need to take to pay off the loan, the more things are likely to turn in your favour. One obvious way this can be seen in action is the situation of repairs being needed on your vehicle. Repairs can be thought of as an investment into your vehicle. You put money into the car, making the judgement that the resultant value you’ll get out of it is going to make the calculation worth your while.
This just makes sense. If somebody told you that your car was going to last ten more minutes, you probably wouldn’t be so keen to splash out on a new set of rims, would you? Factoring into account things like repairs is essentially the same process, with the crucial difference being that you don’t know whether it’s going to be ten minutes or three years. You can take a reasonably good guess, however, and as such judge whether or not you want to pay for the repairs. Once the car loan is paid off, the vehicle is yours—so if you can pay it off before you need to repair it, you’re just fixing something you already own.
Another important thing to remember is that cars depreciate the second you buy them. This is an important aspect of buying an automobile that everybody knows but nobody generally wants to acknowledge. We have no interest in sugar-coating important things like this: that’s just how it is. As soon as you pay the money, it starts to decrease in value. You need to ensure that the loan balance is dropping faster than the car is depreciating to avoid negative equity—a shorter-term car loan is the best way to achieve this.
Now that we’ve seen the value of a sizeable downpayment, how do you actually go about saving it up?
Luckily, this bit is actually pretty simple, and doesn’t take much more than a few minutes and some arithmetic. The standard rule of thumb is the downpayment should represent at least 20% of the car’s value.
To that end, find out the car’s value and divide it by five. Once you’ve got the figure, start working out places in your lifestyle budget that you can start shaving off cash. It doesn’t have to be drastic—indeed, the best budget changes usually aren’t drastic. Saving up for a car loan is a marathon, not a sprint. The more steadily you can do it, the less volatile your finances will be overall, and the more accurately you can plan for the future since you’re not looking at a whole series of peaks and valleys.
If you’ve got the figure for the downpayment you need, there are doubtless plenty of places you can save value. It’s all a matter of priorities. If securing an affordable, sustainable car loan is one of your priorities, you need to make sacrifices elsewhere in your life. Whether that means fewer nights out on the town or just living more conservatively in general, managing to save money—assuming you already have a well planned-out budget in place—isn’t going to be nearly as painful as you think it is.
Humans work best when we have a goal in mind, and if the goal is one that’s important to you, you’ll actually find the sacrifices you’re making are pleasurable; heck, even fun. Going without produces a feeling of immense satisfaction in all of us, as long as the reason we’re going without is clear. Car loans are a fantastic way to get your feet wet in this crucial facet of human psychology.
So there you have it. We spent most of the time explaining the importance of the down payment, because once a goal is sufficiently wanted by you—and you know why it’s important—actually saving the money is going to be the easier part of the equation. If you find yourself flagging, as we all do from time to time, remind yourself of what your goal is. If it helps, write it down on a sticky note and tape it to your fridge.
Or try one of our personal favourites: write the goal in a single line into your phone’s alarm, so that the first thing you see when you wake up is a reminder of what you’re aiming at. This is an excellent way to ensure that your mindset is in the right place for the day to come; and when the day comes that you’ll be finally making the down payment, all the sacrifices and worry will be more than worth it for the feeling you’ll get putting money down on that car loan you worked so hard for.
Here at Hamiltonbadcreditcarloans.ca, we know how difficult it can be to secure a car loan when your credit score isn’t quite what you’d like it to be. That’s why we consider every application we receive. Get in touch with us today and ask us how we can help you.