If you want to join the 84% of Canadians who own their own cars, you need to start serious financial planning. Buying a car is a significant financial commitment and maintaining one also requires a lot of capital.
Fortunately, you do not have to manage this cost all by yourself. You can take out a car loan to help cover the bulk of this. In fact, people in Canada collectively have $3.59 billion worth of car loans at the moment!
You will, however, need to save for a car down payment. So why do you need this and how much do you need to save up? Read on to find out everything you need to know about making a down payment when buying a car.
Why is a Down Payment Required For a Car Loan?
Getting approved for an auto loan in Canada can help you cover the cost of your new vehicle. The average cost of a second-hand car is $25,000 plus, so getting financial support with this can make a huge difference.
Auto loans let you borrow a significant portion of your car’s sale price. You then pay this back to your lender in installments over months or even years. Lenders make money by charging interest on these loans.
To qualify for a loan, most lenders will also expect you to put forward a car down payment. This shows them that you have organized yourself financially to pay for your new car.
It also means that you need to borrow less from your lender. In the long run, this benefits you because it means you don’t have a massive loan to pay back. This means you can pay it off quickly and won’t accumulate too much interest.
So how much do lenders expect you to save for a down payment for a car? Let’s take a closer look.
How Much Should You Save For a Car Down Payment?
There isn’t a set figure that you should save up for your car down payment. This depends a lot on the type of car you are buying, how much it costs, and your credit score.
It is sometimes possible to get a car loan without a deposit. However, these loans usually come with high interest rates and strict repayment terms.
Most lenders think of down payments as percentages of the overall value of a car. So they will expect to see larger deposits for more expensive vehicles.
Down Payments For New Cars
New cars are generally more expensive than second-hand ones, so you will need to save up a larger deposit for these. Most lenders expect to see a down payment of at least 20% of the car’s overall price.
For example, if your new car costs $40,000, you will need to save up around $8,000 for your down payment.
A 20% down payment (or more) protects you from the depreciating value of your car. In the first five years, a brand new car depreciates by between 40 and 65%.
This means if you put down a smaller deposit and have to pay a lot of interest on your loan, you will end up paying way over the value of your vehicle. A 20% down payment, however, sets you up for repayments that evenly match the value of your car over time.
Down Payments For Used Cars
If you are buying a used car then you can afford to save up less for the down payment.
These cars will generally be cheaper than new cars anyway. On top of this, most lenders will accept a 10% down payment for a used car loan.
Can You Make a Larger Down Payment on a Car?
Of course, there is nothing to stop you from saving up more than 10 or 20% for your car down payment. While most lenders want to see a minimum down payment, there is no maximum limit for your deposit.
In fact, making a larger down payment on your car loan can benefit you in the loan run. Let’s take a closer look at why this is.
Large Down Payments Reduce Your Monthly Repayments
First and foremost, making a large down payment means that you don’t need to borrow as much in the first place. This improves your loan options.
It makes it easier to get approved for a loan and means that you won’t have to pay back as much on your loan each month. This makes managing your loan repayments much easier.
You Can Afford to Pay Your Loan Back Over a Shorter Period
Paying smaller installments during your loan repayment period isn’t your only option either. There is another way that making a big down payment can help you manage your loan.
Instead, you could pay a little more each month over a shorter period of time. This means that you will pay off your loan quickly.
There are two key benefits to this. To start with, you will have cleared your debt, which improves your credit score and makes it easier to borrow money in the future.
You will also have a shorter window to accumulate interest on your loan. This means that you get a very good deal on your loan in the long run.
Lenders Charge Less Interest For Large Down Payments
A large deposit can also improve the terms of your loan when you get approved for it. Generally, lenders set better interest rates for loans with large deposits.
This is a great position to be in at the start of your loan period. Low interest rates mean that you get great value from your loan, especially as your car depreciates in value.
How Can a Big Down Payment Help Your Bad Credit Score?
If you have a poor credit score then a big down payment can make a huge difference to the terms of your loan.
Your credit score reflects how well you manage your financial responsibilities before applying for a loan. For example, missing bill payments or sending your rent late will negatively impact your credit score. You can find yours out quickly using free websites, such as Experian.
It is possible to get a car loan when you have a bad credit score. However, most lenders will charge a lot more interest on these loans.
You can combat this by saving up a larger deposit. This will reduce the amount of interest your lender charges and get you a better deal on your car loan.
Tips For Saving For Your Down Payment
Your car down payment will be much lower than the cost of a new vehicle. However, it is still a significant amount of money to save up, and planning ahead can make this easier.
To start with, try to get an idea of how much you want to save by looking at the price of cars that you’re interested in. If they are way over your budget then now is the time to adjust this!
Once you know a ballpark figure for your down payment you can create a budget. This should help handle your income and include a figure to set aside each week or month for your car deposit.
Some people find it easier to save on a weekly basis. For example, $50 a week feels more manageable than $200 a month, although financially it isn’t any different. So find a way to save that works for you.
You may also find that you need to cut back on spending to save more. Creating a budget and looking at your spending can help with this.
Deduct your necessary outgoings from your income. Then create financial limits for your additional spending each week and stick to these. Reducing the amount that you use your credit cards can also make it easier to save up quickly.
Other Ways to Reduce Your Monthly Loan Repayments
As we’ve already mentioned, saving up a large deposit can help you improve the terms of your car loan. However, there are plenty of other things you can do to boost your borrowing power and reduce your monthly repayments.
- Boosting your credit score to around 750 (by paying your bills, rent, and loan repayments on time for a few months)
- Shopping around to compare different auto loan providers
- Adjusting your expectations to find a car that is within your monthly budget so you can borrow less
This will ensure that you get approved for a loan that suits your budget.
Get Help Finding a Car Loan Today
As you can see, saving up for a car down payment can seriously improve your borrowing power and loan options. Make sure you keep this in mind and start saving up before you apply for a loan.
Have you got your down payment for a car in the bank already? Then head over to Cars Fast now to get approved for your car loan in no time. We’re happy to help!