When applying for auto financing, the borrower has the option to contact a number of lenders for the process. This means that the automobile loan can be approved easily and that too at a good rate. Several dealers have several options, some offer full financing while others might offer a rebate on a higher down payment. In case of bad credit buyers, down payment is a requirement in most of the cases. However, several borrowers wish to save this money for future use and go for a lender for full financing at a higher rate. This can lead to an upside down situation in which the borrower owes more money than what the car is worth even after making payments for months. The following example states why down payment is important in auto financing.
Lenders charge a higher rate from no payment down borrowers as there is more risk involved. When some money is being paid down, it is seen that lenders are more relaxed regarding the borrower’s incentive and provide finances at a good rate.
Suppose the finance is done for 20,000 dollars. If the borrower gives down payment of 3000 dollars, then the financed amount comes down to 17000 dollars and the rate charged can be 10 percent (even lower depending on the score). This means that the total amount to be paid back is 18,700 dollars throughout the term. Now, during total auto financing, the rate can be 13 to 15 percent. This means that the borrower has to now pay almost 23000 dollars during the loan term. Saving three thousand one time can lead to paying five more till the end of the term.
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Tags: auto financing
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