How Down Payments Affect Your Monthly Car Loan Payments

Your down payment amount can have a significant impact on your monthly car loan payment. Depending on the interest paid and the length of the loan, making a larger down payment can save you thousands of dollars over the life of the loan. Keeping this in mind can help you to make the best decision possible in determining what kind of car you can afford and should consider.

Straight Loan Reduction

When considering how your down payment will affect your monthly car loan payment, the first step is to understand that a larger down payment reduces the size of the loan. The more you pay now, the less you will have to pay each month. It is easy to let the apparent size of these numbers be deceptive. If, for example, an additional $1000 down would lower your payment by only $30, it might be easy to see this as a poor trade-off. But if the term of the loan is 60 months, the $1000 today, will save you $1800 over the course of the loan. We will address specifics shortly, but it is important to keep in mind that a larger down payment will result in a lower payment.

The Effect of Time

The longer the term of the loan, the more of an impact the down payment amount will have on the total amount of interest paid. Longer loans spread payments out more, so the reduction on a per month basis seems smaller when the loan is longer. What you should remember is that the longer the loan, the more you will pay in interest. If you take a smaller loan (i.e. make a larger down payment), your interest savings is compounded over the term of the loan.

For example, if you are borrowing $15,000 to buy a car and paying 5% interest on the loan, making a $3000 down payment will appear to save you more per month on a 3-year loan than a 5-year because the payment will fall more. In reality, while your monthly payment will see less of a fall off, you will save more in interest making the $3000 on the five year loan. When the money is spread over 5 instead of 3 years, it is less per month, but paying 5% for 5 years instead of 3 is more expensive.

The Effect of Interest Rate

The higher the interest rate that you are paying on your loan, the more of an impact the down payment will have on your monthly payment. As was discussed above, if you reduce the loan amount when the interest rate is higher, you will get a higher net savings. This is true regardless of the term of the loan.

The Cost of Extras

Keeping these rules in mind is important when buying your car. It can also be helpful when the dealer wants to add things into your loan at the end. If you keeps these concepts in mind, you will see that the extra $15 per month the add-on costs has a real cost that is potentially much higher.

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