If you are looking to finance a vehicle, there’s a significant chance that a lender will require some form of down payment for a car. The amount you put towards a down payment will affect your monthly payment and how much money you will owe overall.
Pros and Cons of a Large Down Payment
Pros of a Large Down Payment
When you put up a large down payment, you end up borrowing less. When you reduce the amount you need to be financed, you are saving yourself money in the future.
A large down payment could help you qualify for a loan if you have bad credit. In some cases, a lender can give you a lower interest rate if you borrow less money.
Placing a large down payment is a great way to reduce the size of your monthly payments. The smaller your loan the smaller the payments.
With a larger down payment, you have less monthly payments to make and in smaller amounts. This will drastically reduce the amount of interest you end up paying for the loan.
Most auto loans are front-loaded, meaning that most of the interest is charged up front.
Shorter Loan Terms
If you are able to place a larger down payment, you can make your loan term much shorter. A shorter term will allow you to save on interest. With fewer payments made, you will have less interest expense to pay.
Typically, a shorter loan term could mean higher payments, but not if you left a large enough down payment.
Help Get Approved
Although a large down payment is not a “sure-fire” way to get approved for an auto loan, it can help. A large down payment shows a lender you are serious and committed top repaying the loan.
When you drive off the lot, the car loses a massive amount of value. Providing a large deposit up front on your auto loan also helps you avoid “being underwater” on your loan.
Cons of a Large Down Payment
A larger down payment requires cash. When you put money towards a down payment, you will have to reduce your savings. Make sure you can afford the car prior to buying.
No Lower Interest
If you’re a car buyer with less than ideal credit, it’s important to note that a larger down payment will not help you get a lower interest rate. In rare cases, however, this could be possible.
How Much Should My Down Payment Be?
For used cars purchased through financing, most dealerships will require a down payment of 10% of the vehicle purchase price. If you have a less than perfect credit score, your dealership or lender may ask that you provide 20% down.
So if you have a healthy credit score and want to purchase a $15,000 car, you will need to provide a down payment of $1,500. ($15,000 x .10 = $1,500). Sometimes, lenders can ask for a higher down payment on a new car since they tend to depreciate much more rapidly.
How Can I Get Funds for an Auto Loan Down Payment?
Car buyers do not need to have all of the down payment money in cash. There are a couple of other methods you can use to get passed providing a down payment in cash.
The first and most common option is to trade-in your older vehicle towards a credit to your down payment. If the dealership decides to take on the trade-in, the value of the vehicle will be agreed to by both the owner and the sales manager.
Another popular way to avoid spending hard earned cash on an auto loan down payment is with a cash rebate. Rebates can be offered for both new and used cars as well. If the car you are looking to purchase has a rebate available, the value of the rebate will be subtracted from the vehicle’s purchase price.
If you are looking for additional ways you can source funds for your down payment, check out our complete guide to auto loan down payments here.
If you are looking to buy a new car but are in need of financing, CrediReady can help. Our nationwide network of trusted dealers and verified lenders work with buyers in all credit situations. Take a moment to fill out our free no-obligation loan inquiry form and start shopping for your dream car today!