If I put a large down payment (over 50%) towards a car loan, can I reduce my interest rate and is it smart to even put that much down?
Can you reduce your interest rate? Talk to the lender. Maybe. Probably not. The rate reflects their perception of how much of a risk they're taking with the loan. But if all you're borrowing is $2000, the savings that you might get out of any adjustment to the rate is not going to be all that significant. Sure, it would be nice, but it's not going to be enough to make or break your decision to buy this car. The big savings will be that you're paying interest on a much smaller loan, which means you can reduce your payments and/or pay it off more quickly. REMINDER: NEVER TALK TO AN AUTO DEALER ABOUT FINANCING UNTIL AFTER THE PRICE OF THE CAR HAS BEEN NAILED DOWN -- otherwise they will raise the purchase price to cover the cost of offering you an apparently cheap loan. "Talk to your bank first but shop around a bit as well with other reputable lenders in your area.  Another option, if you're willing to put down ~84% of the purchase price would be to talk to several dealerships BEFORE you set foot on a single lot. Tell them that you are interested in buying a Versa and that you are willing to pay cash but you are not willing to pay more than $10,200. They won't agree (trust me on that) but they will come down from $13,000. Say ""Thanks, I'll call you back."" and call one of the other dealerships on your list and tell them ""I just spoke with this dealership and they are willing to sell me the car for [whatever number they gave you]."" One of two things will happen, either the dealership will come back with a lower price or they will tell you to go buy the car there. Continue this process until you have one dealership left.  I did this with 3 dealerships in 2011 and bought a truck with a $27,000 sticker price for just over $19,000. It took about a week to make all of the calls and I ended up going to a dealership 3 hours away but it was worth it for $8,000." "With that credit rating you should have no trouble getting a rate in that range. I have a similar credit score and my credit union gave me a car loan at 1.59%. No haggling required. In regards to your question, I think you have it backwards. They are more likely to give you a good rate on a high balance than a low one. Think about it from the bank's perspective... ""If I give you a small sale, will you give me a discount?"" This is the question you are asking. Their profit is a factor of how much you borrow and the interest rate. Low rate=less profit, low financing amount = less profit.  The deal you proposed is a lose-lose for them." I had a strange experience buying a new car.  They were offering a deal of 0.9% interest on the loan but only if the loan was above a certain amount.  Below that amount, the interest rate was something like 3%.  Given the amount I was willing to put down, it was cheaper to put less down and get the lower interest rate.  So, once you agree to the purchase price, you need to discuss what finance options they offer.  You might also check in advance with other loan providers (e.g. your bank) to see what offers they have. "The real answer is to talk to the bank. In the case of the last car loan I got, the answer is ""no"". When I asked them about rates, they gave me a printed sheet that listed the loan rates they offered based on how old the car was, period. I forget the exact numbers but it was like: New car: 4%, 1 year old: 4.5%, 2-3 years old 5%, etc.  I suspect that at most banks these days, it's not up to the loan officer to come up with what he considers reasonable terms for a loan based on whatever factors you may bring up and he agrees are relevant. The bank is going to have a set policy, under these conditions, this is the rate, and that's what you get. So if the bank includes the size of the down payment in their calculations, then yes, it will be relevant. If they don't, than it won't. The thing to do would be to ask your bank. If you're only borrowing $2000, and you've managed to save up $11,000, I'd guess you can pay off the $2,000 pretty quickly. So as Keshlam says, the interest rate probably isn't all that important. If you can pay it off in a year, then the difference between 5% and 1% is only $80. If you're buying a $13,000 car, I can't imagine you're going to agonize over $80. BTW I've bought two cars in the last few years with about half the cost in cash and putting the rest on my credit card. (One for me and one for my daughter.) Then I paid off the credit card in a couple of months. Sure, the interest rate on a credit card is much higher than a car loan, but as it was only for a few months, it made very little real difference, and it took zero effort to arrange the loan and gave me total flexibility in the repayment schedule. Credit card companies often offer convenience checks where you pay like 3% or so transaction fee and then 0% interest for a year or more, so it would just cost the 3% up front fee." As others have already pointed out, the bank isn't getting your money upfront - the cash goes to the dealer and the bank will be financing you a much smaller amount. They really don't have any incentive to give you a better interest rate, but it never hurts to ask. The more important (and unasked) question is should you do this? Keeping in mind that a loan with good credit could be in the 1.8% range. Average long-term returns in the market are over 3x that, so by paying upfront you're trading the opportunity for 6%+ returns for the ability to save -2% fees.
"If you are going to finance a used car, it is frequently best to arrange financing before you even pick out the car.    The easiest way I recommend is to talk to a local credit union or two.   They'll be able to tell you your interest rate and terms without having to talk to the dealer at all.  Most likely, they'll be significantly better than the dealer at getting a good interest rate. As far ""what is a good rate?"", check out bankrate for average loan rates: http://www.bankrate.com/auto.aspx Today's numbers look like 2.87% is the average for a 48-month used car loan.   That means if the bank comes back with something ridiculous like 9% or 10% you know they are way overcharging you.   I know someone who got a first-time-buyer rate from Ford and ended up with a 19.99% rate.   I could literally buy the car on my credit card and end up in a better spot. Honestly though, if you are 18 and have $5500 to put towards a car, I'd buy a $4500 car and save $1000 for repairs and maintenance.   After you have the car, put $250 every month for a ""car payment"" into a savings account for your next car." When we speak about a product or service, we generally refer to its value. Currency, while neither a product or service, has its own value. As the value of currency goes down, the price of products bought by that currency will go up. You could consider the price of a product or service the value of the product multiplied by the value of the currency. For your first example, we compare two cars, one bought in 1990, and one bought in 2015. Each car has the same features (AC, radio, ABS, etc). We can say that, when these products were new, each had the same value. However, we can deduce that since the 1990 car cost $100, and the 2015 car cost $400, that there has been 75% inflation over 25 years. Comparing prices over time helps identify the inflation (or devaluation of currency) that an economy is experiencing. In regards to your second question, you can say that there was 7% inflation over five years (total). Keep in mind that these are absolute cumulative values. It doesn't mean that there was a 7% increase year over year (that would be 35% inflation over five years), but simply that the absolute value of the dollar has changed 7% over those five years. The sum of the percentages over those five years will be less than 7%, because inflation is measured yearly, but the total cumulative change is 7% from the original value. To put that in perspective, say that you have $100 in 2010, with an expected 7% inflation by 2015, which means that your $100 will be worth $93 in 2015. This means that the yearly inflation would be about 1.5% for five years, resulting in a total of 7% inflation over five years. Note that you still have a hundred dollar bill in your pocket that you've saved for five years, but now that money can buy less product. For example, if you say that $100 buys 50 gallons of gasoline ($2/gallon) in 2010, you will only be able to afford 46.5 gallons with that same bill in 2015 ($2.15/gallon). As you can see, the 7% inflation caused a 7% increase in gasoline prices. In other words, if the value of the car remained the same, its actual price would go up, because the value stayed the same. However, it's more likely that the car's value will decrease significantly in those five years (perhaps as much as 50% or more in some cases), but its price would be higher than it would have been without inflation. If the car's value had dropped 50% (so $50 in original year prices), then it would have a higher price (50 value * 1.07 currency ratio = $53.50). Note that even though its value has decreased by half, its price has not decreased by 50%, because it was hoisted up by inflation. For your final question, the purpose of a loan is so that the loaner will make a profit from the transaction. Consider your prior example where there was 7% inflation over five years. That means that a loan for $100 in 2010 would only be worth $93 in 2015. Interest is how loans combat this loss of value (as well as to earn some profit), so if the loaner expects 7% inflation over five years, they'll charge some higher interest (say 8-10%, or even more), so that when you pay them back on time, they'll come out ahead, or they might use more advanced schemes, like adjustable rates, etc. So, interest rates will naturally be lower when forecasted inflation is lower, and higher when forecasted inflation is higher. The best time to get a loan is when interest rates are low-- if you get locked into a high interest loan and inflation stalls, they will make more money off of you (because the currency has more value), while if inflation skyrockets, your loan will be worth less to loaner. However, they're usually really good about predicting inflation, so it would take an incredible amount of inflation to actually come out on top of a loan. If I were you, I would pay off my student loans today or tomorrow.  Wouldn't it be nice to be completely debt free and not owe anyone anything?  It doesn't matter what the interest rate of the loan is; there is no need to spend anymore time trying to worry about whether or not the market will allow you to make a tiny bit extra over what you are spending in interest on the loan.  Just get rid of the debt, and you will get to keep every bit of the growth of your investments from here on out. After the student loans are paid off, that leaves you with $15k.  I would take $10k and put it in a savings account for an emergency fund, and put $5k as a start toward your retirement savings in a Roth IRA. At this point, with a fully funded emergency fund, a start on your retirement savings, and no debts, you have really set yourself up for success.  Learn how to budget your income so that you spend less than you make and can save up toward goals like a car (paid for in cash) and a down payment on a house. "This is ""incentive financing"". Simply put, the car company isn't in the business of making money by buying government bonds. They're in the business of making money by selling cars. If you are ""qualified"" from a credit standpoint, and want to buy a $20k car on any given Sunday, you'll typically be offered a loan of between 6% and 9%. Let's say this loan is for three years and you can offer $4000 down payment and/or trade. The required monthly payment on the remaining $16k at the high end of 9% is $508.80, which over 3 years means you'll pay $2,316.64 in interest. Now, that may sound like a good chunk of change, and for the ordinary individual, it is, possibly enough that you decide not to buy today. Now, let's say, all other things being equal, that the company is offering 0.9% incentive financing. Same price, same down payment, same loan term. Your payments over 3 years decrease to $450.64, and over the same loan term you would only pay $222.97 in interest. You save over $2,093.67 in interest over three years, which for you is again a decent chunk of change. Theoretically, the car company's losing that same $2,093.67 in interest by offering this deal, and depending on how it's getting the money it lends you (most financial companies are middlemen, getting money from bond-buying investors who expect a rate of return), that could be a real loss and not just opportunity cost. But, that incentive got you to walk in their door, and not their competitor's. It helped convince you to buy the $20,000 car. The gross margin on that car (price minus direct costs) is typically 20% for the dealer, plus another 20% for the manufacturer, so by giving up the $2,000 on the financing side, the dealer and manufacturer just earned themselves 4 times that much. On top of that, by buying that car, you're committing to buy the parts for the car, a side business with even higher margins, of which the car company gets a pretty big chunk. You may even be required to use dealer service while the car's under warranty in order to keep the warranty valid, another cha-ching. When you get right down to it, the loss from the incentive financing is drowned in the gross profits they make from selling the car to you. Now, in reality, it's a fine balance. The percentages I mentioned are gross margins (EBITDASG&A - Earnings Before Interest, Taxes, Depreciation, Amortization, Sales, General and Administrative costs; basically, just revenue minus direct cost of goods sold). Add in all these side costs and you get a net margin of only about 3.5% of revenue, so your $20k car purchase may only make the car company's stakeholders $700 on the sale, plus slightly higher net margins on parts and service over the life of the car. Because incentive financing is typically only offered through the company's own financing subsidiary, the loss isn't in the form of a cost paid, but simply a revenue not realized, but it can still move a car company from net positive to net negative earnings if the program is too successful. This is why not everyone does it, and not all at the same time; if you're selling enough cars without it, why give away money?  Typically, these incentives are offered for two reasons; to clear out old cars or excess inventory, or to maintain ground against a competitor's stronger sales numbers. Keeping cars on a lot ready to sell is expensive, and so is not having your brand driving around on the street turning heads and imprinting their name on the minds of potential customers." The optimal down payment is 0% IF your interest rate is also 0%. As the interest rate increases, so does the likelihood of the better option being to pay for the car outright. Note that this is probably a binary choice. In other words, depending on the rate you will pay, you should either put 0% down, or 100% down. The interesting question is what formula should you use to determine which way to go? Obviously if you can invest at a higher return than the rate you pay on the car, you would still want to put 0% down. The same goes for inflation, and you can add these two numbers together. For example, if you estimate 2% inflation plus 1% guaranteed investment, then as long as the rate on your car is less than 3%, you would want to minimize the amount you put down. The key here is you must actually invest it. Other possible reasons to minimize the down payment would be if you have other loans with higher rates- then obviously use that money to pay down those loans before the car loan. All that being said, some dealers will give you cash back if you pay for the car outright. If you have this option, do the math and see where it lands. Most likely taking the cash back is going to be more attractive so you don't even have to hedge inflation at all. Tip: Make sure to negotiate the price of the car before you tell them how you are going to pay for it. (And during this process you can hint that you'll pay cash for it.) My opinion is that 50% savings is the number to shoot for, and I strive toward that number as often as possible.  10% - savings for retirement 10% - savings for short term emergency fund 25% - payment on mortgage principal 5% - savings for planned big purchases I overpay the principal so that 25% of my income goes to principal payments, and I separately account for the mortgage interest/home owners insurance as another expense in my budget.  Because of this aggressive payment schedule, the house I bought 2 years ago will be payed in full in another 9 years.  I own another property outright that I paid down in the same fashion and I collect rent on it as a supplement to my income.  I started with a small townhouse that I could easily afford, but now I have a much larger home that I can still easily afford. The emergency fund doesn't need to be more than 6 months of expenses, which is 3 months of income if your expenses are only 50% of your income.  I keep 6 months of expenses liquid and another 12 in a low risk investment.  Once you have your emergency fund funded, you can add that percentage to a different category (say 15% to retirement and 10% to planned big purchases), or you can over-fund it.  I have had a few catastrophes that have depleted that fund, so I like having the extra 12 months of income available. I set the last 5% aside for wants that are not regular expenses.  If I want a car, I save 5% of my income until I can pay cash for it.  I have an infinite number of these wants, so I prioritize them and buy them in order when the cash becomes available. The reason I use percentages is to keep me focused when my income increases. Instead of spending all the additional money that I could afford to spend each time I get a raise. I instead only increase my expenses to the 50% mark.  It was much harder to save 50% when I got my first job out of college, but now I live quite comfortably on that percentage and I could take a large hit to my income before I would need to make significant changes to my lifestyle. Just call your credit union and ask if they will let you refinance at the lower rate. If they won't, then just increase your payment every month so that your car is paid off early (in 36 months instead of 60). You won't get the lower rate, but since your loan will be paid early, you'll be saving interest anyway. A bigger down payment is good, because it insulates you from the swings in the real estate market.  If you get FHA loan with 3% down and end up being forced to move during a down market, you'll be in a real bind, as you'll need to scrape up some cash or borrow funds to get out of your mortgage.