A woman puts down cash to fund her bad credit auto loan

Where Does an Auto Loan Down Payment Go?

Milad Hassibi December 14, 2018

A car is regarded as the second most expensive purchase Americans will make, behind a home.

One of the most important factors in determining whether or not you can afford a new car is your down payment. But what exactly is a down payment for and what does a down payment cover?

What Are Auto Loan Down Payments For?

A down payment has two purposes. First, it helps avoid you having negative equity on your car the moment you drive off of the dealership lot. Second, it shows the lender that you have a vested interest in a certain asset, such as a car.

The loan you receive will be impacted by the down payment you provide. The more money down you provide, the lower the interest expense will be in the long-run.

A woman drives off in a new white car with minimal down payment

A down payment goes directly toward your loan principal. For instance, if your new car is $20,000 and you provide $2,000 as a down payment, your total loan will be for only $18,000.

If you have good credit, you may be able to qualify for minimal or no money down on your auto loan.

For those that have a less than perfect credit score, you will typically be asked to provide a down payment of 10% or $1,000, whichever is less.

By providing a down payment, you are letting the lender know you are serious about paying off your car loan at the end of the term.

The Ideal Down Payment

Although most lenders will require no more than 10% down, it is a good idea to try and put down as much as possible. Most experts recommend a down payment of 20% on a new vehicle, but only 10% down on a used vehicle.

Providing a larger down payment up front will help to offset the effects of the vehicle’s depreciation, which is the vehicles decrease in value over time.

Consumers also have the option of bringing in their old vehicle to use as a down payment. However, you can typically get more for your car by selling it privately

Final Note

When it comes to auto loan down payments, the more you provide upfront, the less you will spend on interest expense over the full life of the loan. If you are looking to buy a new car but have less than perfect credit, 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!

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