Depending on your credit and your bank or credit union, you may be required to provide a down payment toward your auto loan. However, you might optionally choose to provide a down payment to meet a monthly payment budget, save money on interest charges or increase equity in your vehicle.
Loan-to-Value Ratio
Your auto loan provider may require that you provide a down payment based on your loan-to-value ratio. Depending on your credit, you may obtain an approval for up to 120 percent of the vehicle's value as determined by your lender, which allows you to finance your taxes or aftermarket items without a down payment. Borrowers with poor credit might obtain an approval for as low as 60 percent of the vehicle's value. If you try to carry over money from another loan or add aftermarket items into your car loan, you may exceed the lender's loan-to-value ratio and have to provide a down payment.
Monthly Payment Budget
If you need to stick to a budget for your monthly payment amount, then providing a down payment might be necessary if you're not willing to choose a vehicle better suited for your price range. When you obtain your loan approval, you may want to put at least your tax and fees down toward the loan to avoid increasing your monthly payment. Otherwise, every $1,000 that you finance equals about $20 per monthly payment. Depending on your area and the price of the vehicle you purchase, your taxes can substantially raise your monthly car payment.
Creating Vehicle Equity
Philip Reed, a consumer advice editor for Edmunds.com, suggests putting 20 percent of the vehicle's price down toward your loan to increase vehicle equity. Unless you plan to increase your monthly payments to pay off your loan early, you may find yourself in a negative equity position, meaning you'll owe more than your car is worth. This may create issues if you plan to trade or sell your car in the future, as you'll owe more than your vehicle's value and have to provide a down payment to get out of your car loan.
Interest Rate Charges
If you obtained a loan approval with a high interest rate, consider putting as much money down toward your loan as possible. You may spend thousands of dollars over the course of your loan depending on your interest rate. Some states allow as much as 29 percent financing for subprime loans. The less you finance, the less you'll pay in interest charges. If you choose to put minimal money down toward a high interest rate loan, try to pay it off as early as possible.
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