Other than buying a really inexpensive car–perhaps just 10-20% of your annual income/salary–there are two main ways that you can finance a car with low monthly payments: high down payment or extended lending terms. One is much preferable, though difficult, than the other. Let’s take a look at both options, so you can decide for yourself.
High Down Payment
Depending on your credit score and credit history, some lenders may be willing to offer you a car with no down payment (“no money down”). That sounds great on the surface, but these loans cost you too much in total interest over the life of your loan and your payment may be ridiculously high. The standard advice when applying for an auto loan is that you offer at least 10 percent of the total purchase price as a down payment. If you want a low monthly payment, you should offer at least 25 percent down. For proof, let’s look at the monthly payments on a loan for a car totaling $20,000, with an interest rate of 5 percent, and 60 payments.
- Zero down…$377.42 per month
- 10 percent…$339.68
- 25 percent…$283.07
As you can see, your down payment lowers your payment quite nicely, but a hidden benefit is the amount of total interest that you will pay over the life of the loan. With zero down you pay $2,645.48, but with 25 percent down you only pay $1,984.11. That’s a savings of over $600 over the life of the loan!
Extended Loan Term
People who do not have a significant down payment try to manage the monthly payments by extending the life of their loan. Obviously this is easier than saving up 25 percent of the vehicle’s purchase price, but it doesn’t have the same benefits. The standard new car term should be 48-60 months, but some lenders are approving loans for as long as 84 months–some even 96 months.
If you are considering a longer loan term, keep in mind that it requires a higher credit score and will cost you dearly through a higher interest rate and more interest paid over the life of the loan. Let’s look at the loan mentioned above. Where the interest rate was 5 percent for 60 months, a longer note will require an interest rate of at least 8 percent. So, let’s look at the total interest paid for:
- 72 months…$5,247.87
- 84 months…$6,184.84
- 96 months…$7,142.42
Just looking at the numbers, you can see why offering a significant down payment is the best, and easiest, way to get an auto loan with low monthly payments.