My First Car Loan

You've done your research and now you're ready to buy a car. Naturally, you're wondering what your down payment should be. Many people will tell you 20 percent, and that's typically a good answer.

It's smart to make at least a 20-percent down payment on a new car if you can afford it. If you can't make 20 percent, get as close as you can. It will boost your chances of getting favorable loan terms, keep your payments lower and make it less likely you'll end up "underwater," which is when you owe more than your car is worth.

Of course, 20 percent may seem high, and many people buy a car without making this size of a down payment. However, before you opt for a lower down payment, know what you're potentially missing out on because of it.

A Lower Interest Rate

Larger down payments signal to auto loan lending services that you are committed to the car. As a lower-risk borrower, you may be able to get a better interest rate.

Better Loan Approval Odds

When you have less than an ideal credit score, a bigger down payment can help you get approved for financing. With a credit score of 670 or less, you'll likely have a better chance of getting an auto loan if you can make at least a 15-percent down payment.

Smaller Monthly Payment

When you put more money down on your car, you'll have a smaller monthly loan payment and pay less interest over time. This can be especially beneficial if you're able to save for the down payment but are concerned about having a high monthly loan bill going forward.

Less Chance of Becoming Underwater

It's financially risky to become underwater on your car. When you owe more on your auto loan than the car is worth, you will have trouble trading it in when you want to buy a new one. You could end up having to roll the amount left on your original loan into another loan for your new car.

If you total the car in an accident, your insurance company's payout might not cover what is left on your auto loan. Their payout is based on the car's cash value at the time of the crash.

While it may take you longer to save for a larger down payment, the end result is often worth it. When you approach auto lending with a bigger down payment available, you'll be in a stronger financial position than you would be in if you put less money down.