"Do I need to make a down payment to buy a car," and/or "How much should I put down?"



Let's start with the first question. Whether or not you will have to come up with a down payment depends on your credit history. If your credit history is good, chances are that you won't have to make a down payment. If your credit isn't so good, they will most likely require a down payment. Why do auto lenders want a down payment? The reasons are this:

1. They want you to prove that you're committed.

By making a big down payment of a few thousand dollars, you demonstrate that you're invested in the loan. Banks have found that when people make a big down payment they're much less likely to default. A bank will want you to prove your commitment if you've had any credit issues in the past or if you're a first-time borrower without an established credit history.

2. A down payment reduces their risk.

When a borrower defaults on an auto loan, it's usually a pretty big loss for the lender. If your credit history makes the bank think that you might default, they're going to ask for a down-payment (assuming they approve the loan in the first place). But if your credit history is clean, theres no reason to worry about you defaulting and you don't need a down payment.

If you have bad credit or no credit, the banks will look for 10 percent down as a minimum. Most times they want substantially more than that - 20 or even 30 percent down. Keep in mind that if you're a first time buyer, there are some programs for new vehicles - two examples are Ford and Toyota - where you can put little or no money down. As long as you meet their requirements, you'll get a new vehicle with as little down as possible.

Now let's answer the second important question about down payments. How much should your down payment be? The answer is that you should put down as very little as possible.

There are many ways to spend your money instead of using it for a down payment on a car. A car is a depreciating asset. If you could use that money to pay off a high-interest debt like credit cards or to buy a house, you should. It is important to always have a cash fund to make your payments if an emergency arises such as illness or unemployment. If you can help yourself financially by using the money for your down payment for something else, you should do it.

However, there is one case in which you shouldn't "put down as little as possible." If putting a little money down lowers the interest rate on your car loan, you should. If putting some money down will mean a 5.99% rather than a 7.99% interest rate, it would be a smart decision to do this. You can sometimes get a better interest rate by putting an extra $500 or $1000 down. If you get a lower interest rate, you will save yourself a considerable amount of money on finance charges over time.