How Much of My Car Insurance Payout Should I Spend on a New Car?

More money down on your new car is a good idea, but you should consider your overall financial circumstances.

Using It All May Lower Your Rate and Payments

A lower interest rate, lower monthly payments and lower total interest paid over the life of the loan are all benefits to using all or most of your car insurance payout on a new car. Your decision rests not on the fact that you have car insurance money to use but that you have any money at all for a down payment. The more you pay upfront, the more flexible lenders might be with interest, which could lower your monthly costs.

Consider Your Other Loans

If you have a credit card balance (or other debt) with an interest rate of 15 to 20 percent and your new car loan would be closer to 6 to 10 percent, you might be better off paying more on your credit card debt. You would save on interest costs overall, and paying off credit cards is good for your credit score.

Bottom Line

You cannot make this decision without considering your other financial obligations. The key is to identify the best overall financial use for your cash in hand. Most experts would advise you to pay off more expensive (higher interest) debt first. If you have no other loans and debts, it makes sense to put more money down on the car. The only other consideration is whether you could invest some of the cash and get a higher interest rate than the rate on your car loan.

References

• The Simple Dollar: Buying a Car: How Much Down Payment Is Useful?
• Bankrate: What Debt to Pay Off First