A down payment may be required if you have bad credit or trading in a car you might be underwater on. The rule of thumb is to put at least 20% of the car’s price down for a new car and 10% down for a used car.
If you can afford more than 10-20% for a down payment you should put more down. A down payment is primarily used to combat depreciation of the new car or make you less of a risk to lenders.
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What is a Down Payment?
A down payment is a sum of money you pay upfront for a larger purchase or financial transaction. The down payment is a portion of the total price, usually 10-20% of the total purchase price, and then the buyer will finance the rest.
Benefits of Putting Money Down on a Car
For the average car buyer a down payment is usually necessary. Lenders are getting more and more strict on who they lend to and the requirements they have.
Even though you may be required to put money down on a car, it does come with some good benefits.
Best reasons to put money down on a car purchase:
- A lower monthly payment. By putting money down you are essentially lowering how much you will have to finance and pay for the car. this will lower how much you’re expected to pay each month.
- Increased equity. Equity is how much of the car you actually own and is the difference between what you owe and what the value of the car is.
- Less interest paid. A down payment will reduce the total amount you have to borrow and you will pay less interest than if you had to finance it all.
- Potentially better interest rates. Not all lenders do this but some lenders may give you a better interest rate with more put down as it reduces the financial risk.
What is a Typical Down Payment on a Car?
The down payment you need to make on your car loan will ultimately be determined by the lender you’re trying to get auto financing through.
The lender will review several factors before deciding how much you should put down but their main focus is to reduce the financial risk they are taking on.
A typical down payment for a car will range from 10% to 20% but sometimes it can be more or less depending on your credit, equity on your trade-in, income and other reasons.
If you have good credit you likely will have a down payment in the range of 0% to 10%.
For example, if the car you’re purchasing is $35,000 and the lender requires a 10% down payment then you will need $3,500 to buy the car.
If you have bad credit you likely will have a down payment around 20% or more.
For this example, if the car you’re purchasing is $35,000 and the lender requires a 20% down payment then you will need $7,000 to buy the car.
Reasons a Lender Requires a Down Payment
There are a few reasons a lender will typically require a down payment:
- You have a low credit score. If your credit score is considered poor or bad then it’s very likely you’ll have to put money down.
- You have lower income. Having low income typically means you’re a higher financial risk for the lender to default on the loan causing them to get more money upfront.
- You have bad marks on your credit report. If you have had a car repossession or filed for bankruptcy you can expect a lender to require a down payment.
- You have a high debt-to-income (DTI). If your debt to income is above 30% or very close the lender will likely require a down payment.
Should I Put Money Down on a Car if it's Not Required?
A down payment is often required by default, however, in the off chance that a lender doesn’t require one you should still put money down on a new car. The amount you put down can vary but you should put down as much as you can afford without hurting your financial situation.
If you can afford to put money down, the benefits of a down payment far outweigh the consequences, especially for car buyers with bad credit.
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