It does not take a financial expert to tell you that the ideal amount that you should be considering for the down payment when buying a car is the amount that you can reasonably spare without emptying out your savings account. Conventionally, the down payment figure should be 20% of the total amount, but a recent study of purchases has very surprisingly indicated that it is actually 10.4%.


Why are Down Payments so Less?


The sole reason why in recent times the down payment that people usually make is so low is because people are more intent on conserving money for other uses, maybe even for buying additional stuff for the car such as accessories and decorative items. The other big reason why the figure has come down is because vehicle costs have increased substantially while the incomes of customers have remained relatively unchanged. The current figure of 10.4% is actually an improvement over the 2005 figure of 9.9%. The thing to note is that in the intervening decade, new car costs have increased by more than 10%.


The Sweet Spot for the Down Payment


With all the talk about percentages, you need to appreciate that the ideal down payment does not need to be pegged to a specific figure. What the rational customer should be considering is an amount that he can reasonably spare from his savings without causing undue financial distress or leaving him unprepared for emergencies or medical exigencies. Provided it has adequate worth, your existing car can also be traded in to serve as the down payment. Ideal Auto USA has the reputation of giving some of the best trade-in offers.


While the currently-prevailing down payment figure of approximately 10% may seem quite low, it can be managed. However, you need to safeguard yourself against depreciation. In the very first two years, a typical car loses anywhere between 20-35 percent of its original value, and this could mean trouble if the car gets stolen or is destroyed in an accident. This is because at that point of time the 10% down payment will not be sufficient to cover the loan balance.


GAP Insurance and New Car Replacement Insurance


To cover yourself against this you need to invest in new car replacement insurance or a guaranteed auto protection (GAP). This type of insurance costs only a few hundred dollars and is available with all auto insurance companies, dealers and even brokers. It should, however, be noted that the insurance is only for the loss of the car and does not cover you against any loss if you want to trade in the car.


New car replacement insurance ensures that the insurance company pays the full value of the car if it is wrecked or stolen in the first couple of years. The owner only has to pay the standard deductible to get the benefit. This type of insurance is widely available at all insurance companies. The price of the coverage varies from one company to another so it may be a good strategy to scout around for best prices. When you purchase new car replacement insurance or GAP insurance, you can safely pay 10% of the car value and not worry about the downside.


Zero Down Payment


If you qualify for a zero down payment offer then you can keep the maximum savings in the bank. However, these offers are reserved only for those who have an excellent credit score. Usually, these offers are subject to higher rates of interest and monthly payments. Even if you qualify for a “Zero Down/Zero APR” offer, it is still a good idea to make as much of a down payment as you can afford to reduce your monthly outgo. GAP or new-car replacement insurance remains highly recommended.

Author bio: Ashley Curtis is a senior editor of a popular web resource on used cars. Ashley has had over a decade of experience of working with reputed certified used car dealerships, such as Ideal Auto USA.

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