Down Payment on Cars

Whether you are buying or leasing a car, you are often required to make a down payment. It is the initial sum, a fraction of the total cost of the item you wish to buy or lease. In some instances, it serves as a hedge to probable damages and defaulted payments. Down payment usually ranges from 5 to 20 percent of the total purchase price.

When asked how much down payment you can afford, keep in mind that the amount you give will have far-reaching effects on your future cash flows, beyond the obvious monthly payments. This is because down payment affects car buying and car leasing differently.

If you were to buy a car, it is advisable to make a 20 percent down payment. This will cover a year's worth of depreciation, making you safe from being "upside down" on your loan. Upside down means you owe more on the loan than the actual car value. This would end you up paying money just to liquidate or trade in the car, whenever a need arises, because the vehicle is worth less.

Meanwhile, if you were to lease a car, no down payment is recommended. Down payment in leasing is rightfully called cap cost reduction since it lowers your monthly payments. Some people would pay large sums early on to enjoy lower monthly dues. But what they fail to recognise is that when they meet a serious accident in the first few months of the contract, the down payment gets completely lost. What you can do is open a bank account for your supposedly down payment. Do not let your money get tied up with the down payment on a car you do not own.

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