Do I Need A Down Payment To Buy A Car? | Cars and Trucks

By JasonLancaster
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Whenever I'm asked about down payments, it's usually one of two questions:

"Do I need to make a down payment to buy a car," and/or "How much should I put down?"

Let's start with the first question. Whether or not you will have to come up with a down payment depends on your credit history. If your credit history is good, chances are that you won't have to make a down payment. If your credit isn't so good, they will most likely require a down payment. Why do auto lenders want a down payment? The reasons are this:

1. A down payment shows them commitment.

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. A down payment reduces their risk.

If you default on your car loan, it is a big financial loss for the lender. Depending on how bad your credit is, the bank may not even approve your loan at all. If you do get approved for a car loan, they will require a down payment since your not-so-great credit history tells them that you may default. For those of you who have great credit history, you won't need a down payment since there is no reason for the bank to believe that you will default.

The bank will look for ten percent down as a minimum if you have no credit or bad credit. They oftentimes require considerably more, twenty to thirty percent down. If you are a first-time buyer, there are some programs available for the purchase of new vehicles. Toyota and Ford, for example, have programs like these in which you can put little or no money down. You get a new vehicle with very little down just as long as you meet their requirements.

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 the 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.

About the Author

Author Jason Lancaster, an auto industry veteran, created AccurateAutoAdvice.com. You'll find accurate advice on car down payments and auto loan money down.

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