Financial Factors to Consider When Putting a Down Payment on a New or Used Vehicle

When purchasing a new or used vehicle, the biggest factor is often the ultimate impact the purchase will have on your bank account. Despite the importance of financial factors, most people begin car shopping by choosing a make or model that visually appeals to them. They then end up discouraged if the payments for this dream car don’t fit into their cash flow. At this point, the question usually arises, “Should I put more money down to get the payments to fit into my budget?” The answer to this is usually, but not always, no.

How Should I Decide on Which Car to Buy?
The car buying process should always start with figuring out the maximum monthly payment you can afford. I don’t mean “afford” in the “I-don’t-really-need-to-eat” sense that you may use to justify that luxury car purchase. The affording I’m talking about involves sitting down and mapping out all of your income, expenses, and monthly savings to see how your spending stacks up. I find that most people are actually pretty in tune with the amount of car payment they can afford. The trouble arises when they set out for the car lot and fall in love with a car that costs more than that monthly amount. Then comes the internal bargaining and rationalization to splurge on something that you will have to pay down for four to six years.

Don’t Buy a Car Because It Would Look Great With Your Purse/Shoes/Eye Color
Don’t get your heart set on a make and model before you find out if you can afford the car. Take the time to do the math, and then look for cars within your budget. Take that monthly number that you know you can afford and back out a total purchase price at current loan rates using resources such as Bankrate. Once you have figured out an affordable purchase price, go shopping, but remember to account for tag cost, title fees, and taxes.

But What if I Can Put Down Cash to Lower Payments?
Often, a car dealership will make it seem as though putting down more cash will save you money in the long term. The only time that you should really consider putting cash down, though, is when interest rates are more than you are earning on your investments. Right now, the interest rates on car loans are hovering in the 2 to 4 percent range — sometimes even lower — so it doesn’t make sense to put any cash down. As interest rates rise over time, this should be examined more carefully to discern if putting cash down might be justified.

I find that when people are considering putting cash down in a relatively low interest rate environment, it’s usually because they are trying to justify purchasing a car that is a tad out of their budget by lowering the monthly loan payment. If you find yourself in this situation, stop the car lust, consult your budget again, and consider looking for cars that are a little less expensive.

Advisory services offered through Investment Advisors, a division of ProEquities Inc., A Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member FINRA & SIPC. Stable Waters Financial is independent of ProEquities, Inc.

Katie Waters is a member of the DailyWorth Connect Program. Read more about the program here.

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