If you want to maintain a manageable car loan, a good way to do so is by making the largest down payment you can to kick off your financing.
Down Payment Requirements
The down payment you're required to make when you take on an auto loan depends on many factors, including your credit score, the lender you're working with, and the vehicle you're financing.
If you have decent credit – a FICO score around 660 or higher – you may be asked to have a down payment, but you may not have to pay as much upfront as someone with lower credit. If your credit score puts you at risk for special financing, chances are you're required to make a down payment no matter what.
Generally, subprime lenders require borrowers to put down at least $1,000 or 10% of the vehicle's selling price. In this case, the larger your down payment, the better. If you're financing a new vehicle, it may be beneficial to make a down payment of at least 20% of the vehicle's selling price to help keep your car out of negative equity.
Open Up Your Auto Loan Options
Down payments can open up a world of financing possibilities, depending on your situation. See, a down payment lowers the amount you're borrowing – the less you have to borrow the better off you're likely to be in the long run. Borrowing less money means paying fewer interest charges over the life of your loan.
A down payment not only saves you money down the road, but may also help lower your interest rate, qualify you for a wider range of vehicles, or allow you to shorten your loan term. Remember that negative equity we mentioned earlier? A down payment can help keep you out of it by closing the gap between your auto loan balance and the value of your car.
Need Money for a Down Payment?
If you're worried about having to come up with the money for a down payment in cash alone, don't be. Down payments can be made in a few ways, and cash is only one of them. You can also cover your down payment with a trade-in if there's enough equity in your vehicle at the time you trade it in.
Equity occurs when your car is worth more than you owe on its loan. If you're not done paying for your vehicle, you can still sell it to a dealership, or sell it privately, as long as you pay off your current auto loan with the proceeds. Any profit you make above the amount you owe can be put toward the down payment on your next loan. If you're in a negative equity position, you may still be able to trade in your car, but you wouldn’t have any money left over to put toward another vehicle.
You can also make down payments in a combination of cash and trade-in equity to give you more of an advantage on your loan. In rare situations, a lender may even allow you to put some of your down payment on a credit card, though this is rare, especially for bad credit borrowers. If you do put some of your down payment on a credit card, try to cap how much you spend. Remember, you have to pay interest on the credit card, so it just makes your down payment more expensive in the long run.
Ready to Get Started on Your Next Car Loan?
When you're in the market for your next vehicle, but aren't sure where to start, The Car Connection wants to be your go-to source for all things auto. You can research and explore makes and models, and when you're ready, you can sign up for our service and get connected to a special finance dealership near you that has the lenders needed to help credit-challenged consumers.
Don't wait until your car is on its last leg – get started saving a down payment now. If you've got cash in hand, but don't know where to go simply fill out our fast, free, zero-obligation auto loan request form. We'll match you to a dealer in your area so you can get the process on the road without hassle!