When financing a large purchase, it's common to make a down payment - putting forth money to lower the balance that will be financed. For instance, making a common down payment of around 20% of the cost of the vehicle and financing the remaining 80% is fairly typical.
There are a number of reasons to make a down payment, including paying less interest, lowering your monthly payment, increasing your chance of credit approval, fighting depreciation of the vehicle and helping you qualify for special financing offers.
A down payment is not typically required to make a purchase, but putting some money down helps save money over the duration of the loan.
Buyers may be tempted by "zero down" offers, but the downside to such offers is that it can mean higher monthly payments and more interest paid over the life of the loan. And such offers often only apply to those with high credit scores.
A larger down payment can also help you get a lower interest rate on your loan. For example, if a buyer is purchasing a vehicle for $25,000 at a rate of 11.33% and puts down 10%, or $2,500, there would be $22,500 to pay over the course of the loan. If the loan has a shorter than average term, say two years, the buyer would pay $2,751.05 in interest alone. But if the buyer can make a 20% down payment, with the same loan terms, the buyer would pay only $2,445.37 in interest.
The less you have to borrow, the smaller your payments will be each month.
You also have a better chance of loan approval with a higher down payment. This is especially true if you have poor credit or no credit history or are working with a tight budget.
Additionally, cars lose value when they drive off the lot - depreciation. Sometimes a vehicle's value falls faster than the loan can be paid off, a situation referred to as being upside down. A down payment can help increase your starting equity, the difference between what you owe and what you paid for the vehicle. Greater equity means you are less likely to owe more on the car than what it's worth.
Some dealers offer special financing offers for buyers using large down payments. Offers can include lower interest rate, longer term or cancellation of some fees. These offers typically are based on 20% or more down.
