20 Percent Down, 48 Months: Classic Auto Financing Tips Are Still Good Advice

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - December 6, 2018

Have you ever heard the phrase "an oldie but goodie?" It's often used to describe something that's dated or old-fashioned, but still classic, appreciated, or liked. This adage can be used in a lot of ways, including describing why old concepts in auto financing are still good today – like advice about down payment amounts and loan terms.

Changes in Auto Financing

Over the past several years, the average amount financed with a car loan has been increasing. Average monthly payments also hit an all-time high in 2018, according to Experian's State of the Auto Finance Market report from the first quarter of 2018. This is due in part to rising interest rates, but the average vehicle cost has increased as well. Much of this is caused by car buyers moving away from lower-priced sedans and buying more costly SUVs and crossovers.

But even with these changes, some things remain the same.

Sound Advice on Down Payments

Despite all that's changed in the automotive market, it's still a wise idea to put money down on a vehicle. A good recommendation is 20 percent of the car's selling price. Here's why: the more money you put down, the less you borrow.

At 20 percent down, you're also offsetting the initial drop in value of a new vehicle when you drive it off the lot – which is typically around 11 percent. Owing more on a loan than the value of the car is known as being upside down, or underwater, and it's not where you want to be or stay. Getting out of negative equity is easier if you begin with a lower loan balance.

Staying in negative equity territory affects the outcome when you sell or trade in the vehicle down the road. If your car is worth $6,000 but you still owe $8,000 on the loan, you're pretty much out of luck and are on the hook for the $2,000 difference. However, if you use a large enough down payment, and are able to maintain equity in your vehicle, you could, for example, be selling a car worth $8,000 while owing your lender just $6,000. The $2,000 in vehicle equity can be pocketed, or used as a down payment on a new car. Keep in mind that a down payment can consist of trade equity, cash, or a combination of both.

Why You Should Keep Your Auto Loan Short

More sound advice comes from the notion that you should keep your financing term as short as possible, typically around 48 months (a four-year auto loan). Today, according to Experian, more than 70 percent of new car loans are over 60 months, with some stretching as long as 84 or even 96 months.

The reason you should aim for a shorter auto loan is to save money. If the only way you can keep a monthly payment affordable is with an 84-month loan, you should probably reevaluate your vehicle choice. Maintaining affordability and a manageable loan term keeps you from paying for a car that may have well over 100,000 miles before your loan is paid off.

The other reason for a shorter loan term is that the longer you pay on a loan, the more you pay in interest charges. Paying off your balance in just a few years can save you hundreds – or even thousands – of dollars, depending on your APR.

Be Smart About Auto Financing

One good rule that sums up both of these concepts is the 20/4/10 rule. This car budgeting maxim states that you should use a 20 percent down payment, have a four-year loan term, and that your monthly payment should account for no more than 10 percent of your monthly income.

You can budget for your loan using the 20/4/10 rule by calculating the numbers yourself or using an online loan calculator. Then, when you're ready to find a car, you can research vehicles on our new and used car pages, instead of driving from dealer to dealer looking for the right fit.

If you don't know where to turn for an auto loan, we can help with that, too. Here at CarsDirect, we work with a nationwide network of dealerships that can help people in many credit situations get the financing they need. Fill out our easy auto loan request form, and we'll get started matching you with a local dealer today.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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