Do auto loans require a down payment?
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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.