4 reasons not to make a down payment on a car loan
Of course, there are plenty of reasons why you might be able to put down a down payment on a car loan, but are there reasons why you shouldn’t? We outline four reasons why you might not pay a deposit and what the possible outcomes might be.
“I have enough money to pay for the vehicle all at once. “
Buying a car with cash can be a good experience if you can afford it. It allows you to own the vehicle for free and without having to worry about things like defaulting on repayment, car repossession or monthly payments. You also won’t have to pay for full coverage auto insurance if you don’t want it (this is required when you finance).
Vehicles are expensive, however. They are the second most expensive thing many Americans buy, and new ones are getting more expensive every year. At the end of 2020, the average cost of financing a new car hit an all-time high, surpassing $ 40,000 in December according to Edmunds.
Having enough money to buy a vehicle is good, but you need to consider what type of car you can get for the money. If you only have a few thousand dollars to spend, you may be able to buy a used one, but then you will have to deal with the costs of maintenance, fuel and repairs. The older a vehicle, the less expensive it is to buy, but the more expensive it can also be to keep driving.
Also, if you are a consumer struggling with credit issues, use that money as a substantial down payment on an affordable and reliable used vehicle such as a certified used car (CPO) might make more sense in the long run. These vehicles are usually only a few years old and often have had only one owner. Plus, they come with a manufacturer warranty that can give you more peace of mind than a cheaper used car.
“A down payment doesn’t make a big difference.”
This is perhaps the biggest misconception anyone can have about putting down a down payment on a car loan. Have a substantial down payment is the greatest favor you can do yourself when it comes to obtaining auto financing.
A down payment reduces the initial cost of the car you are financing. By borrowing less money, you save money in the long run by reducing the interest charges you have to pay. If you are a borrower with bad credit, a decent down payment is even more important and usually required.
When you take out a car loan, it is very common for lenders to require a down payment, especially if your credit score is lower. Often times, people are surprised at how much money is required upfront when signing their loan agreement. There is an old saying that has been ringing true for many years, and it still comes recommended.
The saying goes that you should pay at least 10% of the selling price of the vehicle on a used car and 20% of the selling price on a new one. Twenty percent or more is the recommended down payment amount if you are trying to combat depreciation, which is the loss in value of the vehicle over time. It can’t be stopped, but making a big down payment gives you a cushion between the value of the car and the amount you owe on the loan.
If your loan amount is more than the value of your vehicle, you are in a negative equity position, which can affect your chances of using the value of your car down the road.
“They are asking for too much money up front.”
Most borrowers who need a subprime auto loan are required to make a down payment of at least $ 1,000 or 10% of the vehicle’s sale price. It varies by lender, however, sometimes they will accept the lower of the two amounts, and sometimes you are expected to bring a specific amount of money to the table.
You also don’t need to use cash only to meet a down payment requirement, as trade-in equity can help. If you have an equity trade-in, you can use the value of that car to meet a down payment requirement and lower the cost of auto financing.
In addition to being a qualification for the approval of a car loan, down payments can also change the terms of your contract. Depending on your situation, the more money you use as a down payment, the more options you can open. These options could include a shorter loan term, a lower monthly payment, a lower interest rate, more savings, and perhaps the ability to finance a more expensive vehicle.
If you think your down payment requirement is too high for a particular car, it may be better to go with a cheaper car. The more you ask to borrow, the higher your down payment requirement is likely to be.
“I need a car now and I don’t have time to save one.”
If you’re really in a bind and need a car now, you might need a down payment more than ever. Even small resellers buy here pay here (BHPH) require borrowers to pay a deposit for the privilege of leaving the lot with a vehicle they have not finished paying for. BHPH lots only sell used cars, but often require a down payment of around 20% of a vehicle’s selling price.
You could get around this problem if you apply for a loan from a co-borrower, such as a spouse. In a solidarity car loan, your income and that of the co-borrower are combined, which allows you to obtain a loan on your own that you cannot claim. Your co-borrower may be able to help you meet the down payment stipulation to get into the vehicle you need. There are a lot of stipulations and requirements for joint auto loans, so make sure you know what you are getting into beforehand.
The bottom line
Whatever the reasons you don’t want to put down a down payment on your next car loan, know that this can be one of the best ways to get the car loan you are looking for. At the very least, you should meet a lender’s minimum down payment requirement. But, if you want to increase your chances of getting a car loan approved, making a bigger down payment than you expected could be the key.
Remember, the larger your down payment, the more you can ultimately save. This can be a big deal if you have poor credit and only qualify for a high interest rate loan.
If you haven’t saved for a down payment because you think your credit rating is too low for a car loan, think again! There are lenders across the country who have the capacity to work with consumers with credit problems, and we know where to find them.
AT Auto Express Credit, we connect borrowers with special finance dealers who have been registered with bad credit lenders for more than two decades. To avoid the hassle of finding one yourself, simply complete our quick, free, no-obligation form. car loan application form and we’ll put you in touch with a dealer in your area.