Whenever we’re asked about down payments, it’s usually one of two questions: “Do I need to make a down payment to buy a car,” and “How much should I put down?” The answer to the first question is, only if your credit requires it. If you have good credit, you don’t need to make a down payment. Here’s why banks want down payments:
1. They want you to prove that you’re committed. By making a big down payment of a few thousand dollars, you demonstrate that you’re invested in the loan. Banks have found that when people make a big down payment they’re much less likely to default. A bank will want you to prove your commitment if you’ve had any credit issues in the past or if you’re a first-time borrower without an established credit history.
2. They want to reduce their risk. When a borrower defaults on an auto loan, it’s usually a pretty big loss for the lender. If your credit history makes the bank think that you might default, they’re going to ask for a down-payment (assuming they approve the loan in the first place). But if your credit history is clean, theres no reason to worry about you defaulting and you don’t need a down payment.
If you have bad credit or no credit, the banks will look for 10 percent down as a minimum. Most times they want substantially more than that – 20 or even 30 percent down. Keep in mind that if you’re a first time buyer, there are some programs for new vehicles – two examples are Ford and Toyota – where you can put little or no money down. As long as you meet their requirements, you’ll get a new vehicle with as little down as possible.
The answer to the second question, “How much should I put down,” is “as little as possible!” Cars are depreciating assets. If you can do anything else with your down payment to help you financially, by all means do it. If instead of putting your money down on a car, you can use your cash to buy a house or pay off a high-interest debt (such as your credit cards), you should do those things. You should also have an emergency cash fund so that if you get sick or laid off, you have enough cash to make your payments. There are usually better ways to spend money than using it for a car loan down payment.
There is one exception to this rule of putting as little money down as possible: if you can lower your car loan interest rate by putting a little money down, do so. If the difference between getting 5.99% and 7.99% is you putting some extra cash down, you’d be smart to do so. Sometimes just an extra $500 or $1000 down can get you a better interest rate. Getting a lower interest rate will save you a lot of money on finance charges in the long run.
So, do you need to make a down payment in order to buy a car? Only if your credit requires it.
How much money should you put down? As little as possible.
As always, take your time when buying a new or used car. Do your car research, get multiple car financing quotes, and feel free to contact us with your questions.