Your down payment amount on a car loan typically depends on your credit score, your lender, and the vehicle’s model year. Essentially, a number of factors – so, let’s explore some ways you can estimate the down payment you need.
Are Down Payments Required by Lenders?
Whether or not a down payment is required for your auto loan is going to largely be determined by your lender and your credit score.
If you have less than perfect credit, you can expect a down payment requirement from a subprime lender. Keep in mind that a trade-in can also count toward the down payment requirement. You can use cash, trade-in equity, or a combination of both to meet the lender’s conditions.
For bad credit borrowers, lenders generally require a down payment of at least 10% of the vehicle’s selling price or $1,000, sometimes whichever is less. The good news is that a down payment can reduce your monthly loan payment and the amount you pay in interest charges over the loan term. The more you put down, the more money you save over time.
If you have good credit, your lender may not require a down payment at all. However, if you want to keep your monthly payment low, and decrease the amount you pay in interest charges, a sizable down payment is still a great idea.
Down Payment Benefits
Auto loans are typically simple interest loans, meaning you’re charged interest each day on the balance of your loan. The less you owe, the less you pay in interest – and vice versa. Your interest rate is largely determined by your credit score. The better your score, the lower the interest rate you’re likely to be approved for.
If you can only qualify for a high interest rate because you have poor credit, a large down payment can help offset the higher interest charges you pay during the loan term.
To show how much a down payment can help you save in interest charges and lower your monthly payment, let’s use an example:
- No down payment – You finance a car for $15,000, with an interest rate of 12%, a 60-month loan term, and no down payment. Over the course of the loan, you pay $5,020 in interest charges, and your monthly payment is $333.67.
- With down payment – You finance a car for $15,000, with an interest rate of 12%, a 60-month loan term, and a down payment of $3,000. Over the course of the loan, you pay $4,016 in interest charges, and your monthly payment is $266.93.
In this situation, if you use a down payment, you save $1,004 in interest charges, and your monthly payment is about $67 less. With $67 in additional disposable income each month, it adds up to $800 more dollars in your pocket every year.
While saving for a down payment is one of the hardest requirements for borrowers to meet, it really is in your best interest to save for a sizable amount to reduce your monthly payment, give you more disposable income each month, and save money overall.
Use a Down Payment to Lower Your Monthly Payment
If you’ve come up with a monthly loan payment that fits your budget, you should try using auto loan payment calculators to calculate how much of a down payment you need. With these tools, you can play around with the down payment amount, your loan term, the vehicle’s selling price, and potential interest rates.
Another thing to keep in mind while budgeting for a new auto loan is the price of car insurance. When you finance a vehicle, lenders require full coverage insurance. It’s also a good idea to leave a little wiggle room in your budget for regular maintenance, like oil changes and wear items like brakes and tires.
Bad Credit and Down Payments
How large of a down payment you need is determined by a number of factors. Again, take advantage of auto loan calculators to see how big of a down payment you need to get to the monthly payment you want, based on your budget.
Every lender is different, and their down payment requirements vary. The price of the vehicle, your credit score, and your monthly income all affect how large of a down payment your lender may require.
If you’re finding it difficult to get approved for an auto loan, or you’re having trouble finding a lender to work with your unique situation, we want to help. At Drivers Lane, we’re connected with dealerships across the country that work with subprime, or bad credit, lenders. For help getting connected to a dealer in your local area, simply fill out our free and easy car loan request form.