What Kind of Down Payment Do I Need to Finance a Car?

What Kind of Down Payment Do I Need to Finance a Car?

Your down payment is the first thing you need to think about when purchasing or leasing a vehicle. If you are looking for an ideal down payment amount, keep in mind that there is no one size fits all. Here are some good ways to find the kind of down payment that you need to finance a car.

Decide the Make and Model of the Car

The first step in finding out the right down payment is finalizing the make and model of the car you plan to purchase or lease. The next step is finding the market price of the new car. Once you know the price of the car, it will be easy to determine the down payment required to finance a car.

Find the Ideal Down Payment Amount

There is no fixed down payment amount and it differs with the lender and car dealerships. If you look at the industry averages, you need to be ready to pay anything between 10% to 20% for a down payment. For you, the ideal down payment should be the amount you can afford without touching your savings.

Find Your FICO Score

Your FICO score plays an important role in the down payment. If your FICO score is above 670, the lender might be okay with a smaller down payment. Customers having a FICO score higher than 800 might also get a zero down payment option with financing. The lender will check your credit score before deciding on the down payment.

What if You Cannot Afford 20% Down?

As mentioned earlier, many lenders will approve your car loan even if you pay 10% down. However, you will be required to pay higher interest charges and larger monthly payments toward your car loan.

Why Should You Never Go for a Smaller or Zero Down Payment?

While it seems exciting to keep your money in your pocket by opting for the zero down payment or a smaller down payment, it might not always be a good financial decision. A car’s value depletes fast and if you pay a smaller down payment, you will owe more for the car than the actual market value after a few years. Even if you plan to sell the car to exit the loan, you won’t be able to get enough money to pay the remaining loan installments.

In another case, if you pay a larger down payment, the market value of the car will be greater than the amount you owe even after a few years. Also, larger down payments mean you can go for a short-term loan and lower interest rates. In the long run, you actually save money by paying a bigger down payment.

As such, there is no hard-fast rule followed by a lender when deciding the down payment. The lender looks at several factors when deciding the down payment so you need to keep your fingers crossed until the lender tells you the final figure. There are several auto down payment calculators online that can provide you with a basic idea of the kind of down payment you would need to finance a car.