AUTO
The Benefits of Using a Down Payment for an Auto Loan
Expected read time: 4 minutes
A down payment is the first in a series of payments you make when you’re financing a large purchase. For example, it’s common to make a down payment of around 20% of the cost of a car and finance the remaining 80%. A down payment is your own money — not a loan — and shows the seller you’re serious about making the purchase. There are other important benefits to down payments, too.
Is a Down Payment Required for an Auto Loan?
While you can buy a car with no down payment, you’ll almost always save money by putting something down, and larger down payments tend to lead to bigger savings over the life of your loan.
Some dealerships advertise “zero down” deals, but these offers usually require you to make bigger monthly payments and accept much longer loan terms (which means paying more total interest). These deals are also usually reserved for people with very high credit scores.
Larger down payments tend to lead to bigger savings over the life of your loan.
Pay Less Interest
Auto loans can help you spread out the big cost of a car over many months, but they can also be expensive when you consider their fees and interest. The good news is you can take steps to reduce these costs, like getting certain fees waived.
Making a down payment also brings down the cost by reducing the amount of money you have to borrow and pay interest on. In some cases, making a larger down payment may also help you get a lower interest rate on your loan.
How Much Can a Down Payment Save You?
Say that Sam is buying a car for $25,000 at a rate of 11.33%. They make a 10% down payment of $2,500, leaving $22,500 to pay off in 24 months. Over the course of those 24 months, they’ll pay $2,751.05 in interest alone.
But what if Sam waits, saves, and makes a bigger 20% down payment of $5,000? With the same interest rate and term, they’ll pay only $2,445.37 in interest. The bigger Sam’s down payment, the bigger their savings will be on the cost of the loan.
Savings by Down Payment and Term on a $25,000 Car
|
Down Payment |
Term Length |
Interest Rate |
Total Interest Paid |
|---|---|---|---|
|
10% ($2,500) |
24 months |
11.33% |
$2,751.05 |
|
20% ($5,000) |
24 months |
11.33% |
$2,445.37 |
|
25% ($6,250) |
24 months |
11.33% |
$2,292.54 |
|
|
|
|
|
|
10% ($2,500) |
36 months |
11.33% |
$4,145.12 |
|
20% ($5,000) |
36 months |
11.33% |
$3,684.55 |
|
25% ($6,250) |
36 months |
11.33% |
$3,454.27 |
Lower Your Monthly Payments
The bigger your down payment, the less you have to borrow — and the less you borrow, the smaller your payments will be each month. Those smaller monthly payments leave more money to cover other costs related to car ownership like your title and registration, insurance, and seasonal maintenance.
How Much Can a Down Payment Change My Monthly Payments?
Let’s revisit Sam’s situation. They’re buying a $25,000 car at 11.33% for 24 months. If they put down 10% ($2,500), then they will have a hefty monthly payment of $1,052.13. But if they increase their down payment to 25% ($6,250), then their monthly payment drops to $876.77.
Monthly Car Payments by Down Payment and Term on a $25,000 Car
|
Term Length |
Down Payment |
Monthly Payment |
|---|---|---|
|
24 months |
10% ($2,500) |
$ 1,052.13 |
|
24 months |
20% ($5,000) |
$ 935.22 |
|
24 months |
25% ($6,250) |
$ 876.77 |
|
|
|
|
|
36 months |
10% ($2,500) |
$ 740.14 |
|
36 months |
20% ($5,000) |
$ 657.90 |
|
36 months |
25% ($6,250) |
$ 616.79 |
Increase Your Chance of Approval
Auto lenders take a risk any time they loan money. If the borrower is deemed risky, this can result in a more expensive loan or the possibility the loan won't be approved. You can do things to increase your chance of approval — and even reduce of the cost of your loan — like improving your credit score, finding a cosigner, and paying off other debt before you apply for a car loan.
Making a down payment also may increase your odds of approval. This is especially true if you’re:
- Buying a car with poor credit or no credit history
- Just starting your career and working with a tight budget
- Buying a car as a college student or still managing your student loans
You can do things to increase your chance of approval.
Fight Depreciation
Cars lose value as soon as you drive them off the lot. In some cases, the value of your car can drop faster than you can pay off the loan, a situation known as being upside-down. Down payments help offset depreciation by increasing your starting equity, or the difference between what you owe and what you paid for the car. When you start with more equity in the car, you’re less likely to end up paying more than your car is worth.
When you start with more equity in the car, you’re less likely to end up paying more than your car is worth.
Qualify for Special Financing
Some dealerships offer special financing opportunities for buyers who make larger down payments. This might include a lower interest rate, a longer term, or waived fees. Just be aware that in some cases you may need to put down 20% or more to qualify for special financing.
The Takeaway
You might be yearning for that new car smell, but saving for a down payment could cut your payments by hundreds or thousands of dollars. Check out our proven ways to save money fast, find the right savings tool for the job, and you’ll be cruising in your new ride sooner than you think.
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