Whether a down payment is required when an automobile purchase is financed depends on your credit rating, the value of the vehicle and---in some cases---your personal preference. A down payment lowers your monthly loan payment and decreases the amount you will pay back over the life of the loan. While some financing offers leave the decision regarding a down payment to the buyer, in other circumstances you may have no choice but to provide a down payment.
Loan-to-Value Ratio
A down payment may not be optional. Auto loan providers assess a vehicle's value and a borrower's credit standing to determine the amount of a vehicle loan, known as a loan-to-value ratio. With poor credit, you may obtain a loan approval, but for as low as 60 percent of the vehicle's bank-determined value. For this reason, you may find that you can't finance your tax charges, aftermarket purchases or complete vehicle price, so you'll have to put money down toward the loan.
With excellent credit, you might obtain a loan for up to 120 percent of the vehicle's value.
Income Issues
If you have good credit but your income is limited, your lender may require a down payment to ensure your monthly payment is affordable. Without a down payment, you may not obtain an approval. For example, if you make $22,000 per year but your monthly expenses when annualized total $17,000, your lender will decline a loan that requires a payment of $500 per month. It may, however, approve financing of a vehicle that requires a payment of $200 per month. You may have to increase the length of your loan term and provide a down payment to obtain a loan approval to purchase the more expensive vehicle.
Interest Rate and Term Consideration
Most auto loan providers adjust interest rates by term length. You may obtain the same rate for purchases financed for up to a 60 months. Rates increase for a 72-month loan and increase again for a longer term. To obtain a competitive rate and an affordable monthly payment, you may want to provide a down payment to avoid paying back excess money for interest charges. Also, if you have an opportunity to obtain a zero percent loan for 36 months, the monthly payment may be too high for your budget. You may have to put money down toward the loan to afford the monthly payment amount.
Depreciation and Loan Amount
Even if you don't have to provide a down payment toward your loan, consider doing so to create equity. Financing more than your vehicle's value results in an upside down car loan, meaning you owe more than the vehicle is worth. This creates problems when you try to sell your vehicle or trade it in toward another purchase. While a collision policy is required by most lenders during the term of a loan, it only pays your lender for the vehicle's market value if the car becomes a loss. You'll have to satisfy the remainder of the loan to protect your credit standing.
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