Whenever I'm asked about down payments, it's usually one of two questions:

Is a down payment necessary to buy a car?, and/or How much should my down payment be?

The first question's answer is this: A down payment is necessary to buy a car only if your credit requires it. You probably won't have to make a down payment if your credit is good. The reasons auto lenders typically want down payments are:

1. A down payment shows them commitment.

A big down payment such as a few thousand dollars demonstrates that you are invested in the loan. People are much less likely to default on a loan from the bank if they have made a big down payment. If you have past credit issues, a bank will want you to prove your commitment. Another reason they may want you to prove your commitment with a down payment is if you are a first-time borrower and have not yet established a credit history.

2. The lender's risk is reduced by a down payment.

If you default on your car loan, it is a big financial loss for the lender. Depending on how bad your credit is, the bank may not even approve your loan at all. If you do get approved for a car loan, they will require a down payment since your not-so-great credit history tells them that you may default. For those of you who have great credit history, you won't need a down payment since there is no reason for the bank to believe that you will default.

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.

There is one exception to the rule of "putting as little money down as possible" - if you can lower your car loan interest rate by putting a little money down, do so. If the difference between getting 5.99% and 7.99% is you putting some extra cash down, you'd be smart to do so. Sometimes just an extra $500 or $1000 down can get you a better interest rate. Getting a lower interest rate will save you a lot of money on finance charges in the long run.

About the Author

Author Jason Lancaster, a  veteran car industry, developed AccurateAutoAdvice.com. You'll find accurate advice on auto loan down payments and money down on a car.

Author: JasonLancaster Total views: 72 Word Count: 555

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