Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 20, 2012

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All auto loans do not require a down payment, but this allowance has not always been the standard.

In the past, car dealerships and lending companies usually required at least a down payment in the 20 percent range for a new car. This was due to the fact that new cars instantly depreciate in value once they are driven off the dealership lot. Paying a down payment helps to balance this value decrease. It also protects the lending company if they have to repossess the vehicle. If repossession occurs on a vehicle with a down payment, lenders will lose less money in the deal.

Due to a competitive auto loan market, many lending companies are now willing to take a risk and offer a new or used car with a low or non-existent down payment. The no down payment offer is used as an incentive to attract more buyers.

But do not forget that lending companies still need to make a profit.

No down payments are more of a marketing tactic than a great deal for borrowers. For lenders, money that is initially lost due to not requiring a down payment is regained later with higher interest rates or more expensive sales prices.

Large down payments reduce the overall debt owed to the lending company, enabling a borrower to reduce either the monthly payments or the overall payment terms for the new auto loan. When a borrower chooses to begin a new loan without a down payment, the full cost of the car must be divided between the monthly payments.

If a lending company does not require a down payment, borrowers are still allowed to provide one for the loan agreement. Making a down payment on an auto loan shows lenders that a borrower is serious about the deal. A lender will usually reward a borrower who is willing to put money down with a lower interest rate.

Secondly, when a payment is made for a new car, it helps prevent the car from being “upside down” which is when a car owner owes more money on a vehicle than it is worth. Although most new loans are upside down for a few months, a larger down payment between 15 to 30 percent enables a borrower to escape this lending dilemma quicker.  

As with all forms of lending, the rules vary depending on the borrower’s lending history and credit score. A down payment is likely a requirement for those with poor credit scores. Since a lower score denotes a higher risk, the lender will usually require a down payment on a new auto loan. 

Although a down payment usually requires several months’ worth of savings and planning, it is recommended for borrowers. A new car is still a big purchase for many consumers, and it should not be done lightly or quickly because of a “no down payment” deal. Comparing rates online at loans.org and researching about the industry educates a borrower about their upcoming financial obligations. A new car, made possible because of an auto loan, should be a conscious and well-planned purchase that will benefit the borrower for years to come.