Car insurance Do I Need A Down Payment To Buy A Car?
There are two questions that are frequently asked about a down payment on a car:
“Is a down payment necessary to buy a car?,” and/or “How much should my down payment be?”
The first question’s answer is this: A down payment is necessary to buy a car only if your credit requires it. You probably won’t have to make a down payment if your credit is good. The reasons auto lenders typically want down payments are:
1. They want you to prove that you’re committed.
If you are required to put down a few thousand dollars, the lenders believe you are committed to the loan. Banks feel that if you have made a down payment, you aren’t as likely to default on the loan. You will need to prove that you are committed to a loan if you don’t have good credit history. If you are a first-time borrower or do not have an established credit history, you will also probably be required to prove your commitment with a down payment.
2. They want to reduce their risk.
It’s a pretty big loss for the lender when a borrower defaults on a car loan. If a bank approves your loan and your credit history indicates that you may default, they’re going to ask for a down payment. Again, if you have clean credit history, there is no reason for the bank to think that you will default. In this case, they won’t require 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 second question’s answer is: “You should put down 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.
You shouldn’t put down as little as possible, however, if doing so means lowering the interest rate on your car loan. If a bigger down payment will get you a 5.99% interest rate instead of 7.99%, you should do it if you can. Sometimes $500-$1,000 is all it takes to get a better interest rate. In the long run, lowering your interest rate will save you a good amount of money on finance charges.
Author Jason Lancaster, an auto business veteran, developed AccurateAutoAdvice.com. You’ll find accurate advice on auto loan down payments and car down payments.
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