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<\/p>\nBuying a car, new or used, is a financial commitment. You can make a down payment, reducing the amount you\u2019ll have to pay monthly on the vehicle. But what if you have more pressing debt, like a credit card or student loan debt? Does it make sense to sign up for a car payment plan and use the short-term cash to pay other debts first? We\u2019ve analyzed the pros and cons of each choice.<\/p>\n
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Let\u2019s be honest, few of us can pay the full price of a vehicle out of pocket. If you make a down payment, you\u2019ll still finance or borrow the remainder of the cost. But the payment reduces your loan-to-value ratio\u2014the amount of your loan divided by the cash value of the vehicle. A lower loan-to-value ratio often\u00a0leads to better loan deals. You might get a shorter loan term, a better interest rate, or reduced monthly payments.<\/p>\n
You\u2019re less likely to go underwater. Car loan holders are considered \u201cunderwater\u201d or \u201cupside down\u201d on a loan when they owe more money than the car is worth. This is also called, in less scary-sounding terms, having negative equity.<\/p>\n
How can negative equity affect you? If the car\u2019s stolen or totaled, or if you need to sell, you\u2019re still on the hook for monthly loan payments. And the lower worth of the car means your insurance won\u2019t pay enough to cover the cost. So you\u2019re paying full price for a car you no longer have.<\/p>\n
The rule of thumb is to put down 20 percent of the value of the car. This amount is large enough to keep you from going underwater, but not large enough to make the car unaffordable. To calculate how much a 20 percent down payment will be, use our car affordability calculator to figure out what you should spend overall.<\/p>\n
Good credit might get you a great loan deal. With stellar credit, you can often get low-interest rates and a short loan term without making much of a down payment at all. Dealers like to offer incentives, especially for new cars, and might even give you an 0 percent Annual Percentage Rate (APR) for the loan. With a deal like that, you can save the down payment cash for other debt.<\/p>\n","protected":false},"excerpt":{"rendered":"
Buying a car, new or used, is a financial commitment. You can make a down payment, reducing the amount you\u2019ll have to pay monthly on the vehicle. But what if you have more pressing debt, like a credit card or student loan debt? Does it make sense to sign up for a car payment plan […]<\/p>\n