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Q&A: I’m Financing A Car; Should I Make A Down Payment Or Pay Off Debt?

You can get a low APR car loan with little or money down (with good credit). Use savings to pay off credit cards or other debt, not as a down payment.

Here’s a question from Nancy, a reader:

I’m in the process of purchasing my first car. I make $30,000 and have student loans, but I save by living with my parents. After law school, I consolidated some credit cards into a personal loan from my credit union at 9.24 percent (a much lower rate). I have it down to $3,900 and pay $250 per month.

I am considering buying a used car that costs $18,000, and I have saved $5,000. Should I use that money to pay off the loan or as a down payment on the car?

My answer

I recommend you use $3,900 of your $5,000 savings to pay off the 9.24 percent personal loan even if that means you don’t make much of a down payment on the car.

Of the remaining money, I would use $500 as a bank account buffer to give you the start of an emergency fund for unexpected expenses. You have a good safety net living at home with your parents, but the sooner you get in the habit of creating and maintain rainy day savings, the better.

This only leaves you with $600 for a down payment, which isn’t a lot, but the reality is — if you have good credit — that may be all you need to secure a loan.

Related: Learn how to check your own credit score — free, no catch — here

If you have past credit problems or don’t yet have a credit history, however, you will have to put more money down toward the car. In this case, you’ll want to figure out just how much of a down payment you’ll need before paying the rest toward your refinanced credit card debt.

Save on interest and your monthly payment

With your decent credit score (722), your credit union has offered you a 3.5 percent APR on the car loan, far better than the 9.24 percent on the unsecured personal loan. It was smart to get the auto financing quote ahead of time, but don’t forget to see if the dealer can beat the rate…maybe not, but it doesn’t hurt to ask.

Also, if you repay that personal loan and buy a car, you’ll have a lower total monthly payment, allowing you extra room in your budget that you can spend or save.

For example: If you finance $18,000 at 3.5 percent for four years, you’ll have a payment of about $402. If you finance $13,000 (after a $5,000 down payment), your monthly payment is $290. Combine that with your $250 loan payment and you’re paying $540 a month—$138 more—until the personal loan is paid off.

Run these numbers for your own situation using our free auto loan calculator. 

It doesn’t always work out this way, but in this case what’s best for your monthly budget (a single, lower payment), is also better for your long-term bottom line (paying less total interest).

Keep your car costs as low as possible

I’m glad to hear you’re buying a used car, as a new car’s rapid depreciation would put you upside down on a loan right off the lot, especially without a down payment.

With student loans and a modest starting income, I recommend being cautious with the total amount of debt you take on. (This is what happened to me…I graduated with some debt, did not earn a lot, and piled more on so I could live like I wanted to.)

Consider how much car you can afford carefully — or use our car affordability calculator to get a sense of how much (or how little) car you should realistically buy.

Good luck!

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Published or updated on March 23, 2012

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. i am looking to buy a used car in the $2500 $7500 range is this possible? thomas economides brooklyn new york

  2. TonyDivi says:

    Great info! Buying cheaper and paying down the cards is the smart way to go.

  3. David Weliver says:

    I specifically didn’t mention that maybe she should buy a less expensive car because I knew you guys, would :)

    Although I agree that she might want to consider a cheaper car, not everybody’s comfortable buying a $5,000 used car which will need more maintenance sooner and may be more likely to have hidden problems. If Nancy weren’t living at home, didn’t have the savings to pay off her consumer debt, and weren’t at the very beginning of her career, I’d have more reservations about spending that much on a car.

    But considering that she won’t have other consumer debt other than the car payment, she doesn’t have rent to pay, and she will hopefully have opportunities to increase her income in upcoming years, opting to spend more on a car that’s newer and (hopefully) more reliable is acceptable, in my opinion. Of course it’s a trade-off; perhaps she’ll have to live at home for another year before she has the emergency savings to live on her own; so be it.

    In other news; we have an update from Nancy. She bought a car.

    “The car I was looking to buy was priced on the lot at $18K. I had my uncle test drive the car because he’s a retired used car manager. The car is great but has been on the lot too long for the dealer (7 months) so we were able to negotiate them down a bit. I was able to come up with a better down payment than I initially thought, and still pay off that other loan. I also still have my buffer savings at $600.

    “I am now financing the car at $15,211. I had the dealer check to see if they could do better than my bank, based off what my bank quoted me a few days ago when I qualified for a $20k loan. As it turns out, when I called my bank this morning to update the finance price, I got quite a deal from them. Financing at $15,211 dropped the interest rate to 2.99%, but because I plan to auto draft, and I already use direct deposit and web bill pay through them, the final interest rate will be 2.49% for a 48 month term. My payments will be about $333.41 per month.”

  4. Taline says:

    I agree with paying off the credit card debt…great advice!

    I also agree with Chance…I think you should purchase a car wayyyyy cheaper!

  5. Chance says:

    I would challenge you to go for a MUCH cheaper car…I mean, A LOT cheaper…try a few thousand dollars TOTAL. It’s extreme, but it will allow you to more quickly become debt free, and build up an emergency fund like others have suggested.

    A $400 car payment in your world would represent upwards of 20% of your take home pay! This is ludicrous! It’s great you’re saving money by living with your parents, but are you really “saving” money if you’re throwing that much of it at an expense that’s plummeting in value?!

    I would guess I’m a few years older than you are, and would have loved to have gotten sound advice “back in the day”. Save your money…don’t spend it all on something that’s going down in value. Listen to others and build your rainy day fund…it will be worth every bit of effort.


    • Greg says:

      I very much agree with you Chance, challenge yourself to go as cheap as you can. Trouble is every new car sold now is about $20K msrp, maybe $18K for some models such as base Chrysler 200 and Honda Civic DX. Unless you put some healthy amount down, $400/mo/60mo is about what you have to pay for just about everything. My only advice is find well kept old lady cars, or 5 spds of some kind in a truck or small car, and learn how to do you own work on them.

  6. Sam says:

    I’m in a very similar situation to you right now in that I’m living with my parents and paying down student loan debt and I recently had to buy a car as well, so I know how all of this goes. That being said I have a higher income and I still chose to go with a significantly cheaper car, in the $12,000 range. I think the $18,000 car would blow your budget out of proportion, and from a maintenance standpoint you’re really not any better off. There are a ton of great cars out there in the $10,000-$12,000 range. Consider going cheaper and saving yourself a whole lot of money in interest payments.

    • Greg says:

      I worked for a used car dealer and the Manheim car auction in Pittsburgh from 2004-2006 prior to college graduation and I can say from experience a retail $10K-$12K automobile is in fact a $5K-$7K one wholesale, the wholesale price being roughly what the unit was actually worth. The rule used to be, the lower the value the higher the margin, so a $10K wholesale value car (so 2-3 years old sub 50K miles) was never priced $20K retail (because new cars go out around that much), but once you got into the $5K range you at least doubled what you paid for it; so $5K for $10K retail, $3K for 6ish. $1500 for $3ish, etc. The reasoning was you expect junky trades (that you don’t want or can’t sell) eating into your margin, hagglers, or those who have straight cash (and thus leverage) fishing for a better price.

      There was a time where $5-7K at the auction netted you a half decent 5-7 yo/60K miles type ride (American/Korean in those days, Hyundai had weak resale then, although Japanese was always much higher), but I believe this time has past. You would not believe the junk out there, esp after 2010. I have recently seen 2000 MY Camrys with 200K do $3500-$4000 at the dealer only auction (which is insane for 200K on the clock), stuff like that is destined for ‘buy here pay here’ lots where people are so poor they only have a grand to put down and in this state welfare gives them up to $2K car buying assistance, and dealers are well aware of this. The down-payment money (plus welfare) essentially pays for the actual price of the car, and the customer finances the other $3K-4K margin over a two year period at double digit percent. Great scheme, but to do it you’re dealing with a lot of bs and riff-raff.

      In August 2010 I bought my ’08 Grand Prix (53K, GT, loaded) through a favor done to me by an old friend, I paid $11,200 at the block, plus $250 Manheim auction fee, and $500 house package to the dealer who lent me his credentials. At the time I felt I overpaid a little since it was only worth 10ish but I love the car and haven’t had any problems in 17K miles, but looking back I think I stole it. You can’t even find a decent used car like this for any price in the past nine months, I have been looking for my brother at both public and private auctions and the cars just aren’t there… a ‘good’ Grand Prix/Impala/Taurus type car has 80K-90K and is priced similar to what I paid for mine (bear in mind the cars are now two years older, so shouldn’t they be less?), they usually are in the 120-150K mileage range and dealers want $6-$8K at the auction. I haven’t checked Camcords (slang for Camrys and Accords) but if the American stuff is going high, the Japanese stuff will give you a nosebleed.

      Between Washington and the Fed wrecking the economy it doesn’t make sense to buy ‘cheap’ (sub 10K in real value) used unless you have an “in” or find a deal on an estate car etc. Provided interest rates remain near zero and your credit isn’t shot, buy something new and suck up the depreciation. The used car market is going to take years to really recover, and it will probably never get back to where it was from 2000-2010, because new car production has not (and prob will never) gone back to pre-2008 levels. Welcome to the new normal, 10%-20% real unemployment, oodles of gov’t and private debt, weak bond market, iffy stock market, endless money printing, and as long as the Democrats remain strong (regardless of who their candidates are) it will never end.

  7. Sarah says:

    I also agree with the suggestion to pay off the personal loan and second Mark’s suggestion to shop for a cheaper car. If you are going to spend $18k on a used car, you might as well buy a new economy car such as a Honda Civic and get lower financing. For example, in 2005 (the year I graduated college) I purchased a new Honda Civic for $17k, with only $500 down and had 1.9% financing on a 3 yr loan. Although a slightly higher monthly payment, I could afford them because I lived at home with my parents for a year. The car was paid off early and hasn’t had any expense other than normal maintenance to date. However, I may have been able to save more sooner had I shopped for a cheaper used car at the time. Good luck!

  8. Mark says:

    I definitely agree that the money is better spent paying off the credit card debt and having less money for a car down payment. $18K still seems like a lot of money to spend on a used car. There’s a lot of reliable cars (04 – 07 Accords & Camry’s) that you can buy in the $5 – $10K range, which would allow Nancy to build up an emergency fund quicker. Spending over 50% of your gross income on a car seems a little too much IMO.

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