Who Gets My Down Payment on a Car Loan?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - June 9, 2021

It’s common to apply for an auto loan and be required to put some money down to get everything rolling. But who gets the down payment?

Where Down Payments Go

If you’re buying a vehicle from a dealership, any cash down or trade-in equity that you want to use is put toward the car’s selling price. This means the dealership takes the down payment and it knocks down how much you need to finance with your auto lender.

Want a car for $20,000 and you’re required to put down 10% of the price? That’s a $2,000 down payment requirement, and now you only need to finance the vehicle for $18,000.

You may be thinking, “But if auto lenders don’t get the down payment, why do they require it?” Good question.

It’s because down payments provide security to the loan, lower your monthly payment, and prove to the lender that you’re willing and able to invest in your own success. By bringing money to the table (also called having skin in the game), you’re essentially telling the lender, “I’m ready and willing to repay this loan because I’ve invested a good amount of money into the vehicle already.”

If you have poor credit, it’s very likely that you’re going to need a down payment to qualify for a car loan. Since a less than perfect credit score can make a lender question your ability to repay borrowed money on time, they often require a bad credit borrower to front some cash to lower the odds of the loan falling into default.

Borrowers that have a down payment typically have a higher chance of completing the loan successfully and making their payments on time. One of the biggest factors of auto loan eligibility is your ability to repay the loan on time – and with cash down, you’re increasing the chances of being able to do just that.

How Much Should I Put Down?

There’s an old car-buying rule called the 20/4/10 rule. It states you should put down 20% of the vehicle’s selling price, finance the car for no more than four years, and that your loan payment, auto insurance costs, and monthly vehicle expenses shouldn’t be higher than 10% of your monthly income.

This old standby rule is falling out of practice lately, due to the rising price of new cars. However, the 20/4/10 rule has good roots that bad credit borrowers can learn from.

Here's how the 20/40/10 rule applies to financing:

20% Down – Benefits of a Large Down Payment

By having a substantial amount of cash to put down on a vehicle, you’re doing multiple things. First, you’re lowering your monthly payment. Secondly, you’re lowering your interest charges (which is very important to many bad credit borrowers). And thirdly, you’re increasing your approval odds because your total financed amount is less.

4 Year Term – Benefits to a Short Loan Term

Auto loans almost exclusively use a simple interest formula. As a borrower, this means the longer the loan term, the more you pay over time. A simple interest formula means your interest charges accrue based on your remaining loan balance, rate, and length of the term. By choosing a shorter loan term, you’re saving money because you’re paying off your loan faster. If you’re expecting to get a less-than-ideal interest rate, consider a shorter loan term to lessen how much you’re going to pay the lender over time.

10% of Income – Monthly Vehicle Expenses

Vehicle expenses don’t just include your car payment – it includes your auto insurance premium, cost of gas, repairs, regular maintenance, tires, oil, and more. Don’t be a payment shopper and only care about your monthly loan payment. Be sure to consider all the other costs of owning a vehicle, and remember that you’re required to have full coverage auto insurance when you finance, which is typically around $100 a month.

Really, Though, How Much Do I Need Down?

As we said, putting 20% down on a car isn’t so common anymore. Many borrowers appear to be putting down between 10% and 15% on used and new vehicles nowadays. Borrowers that use our services have an average down payment of $2,066, according to data from our nationwide dealer network.

If your credit score is poor, you can expect to need at least $1,000 or 10% of the vehicle’s selling price to be considered for an auto loan. Sometimes, you’re allowed to put down whichever of the two amounts is less.

However, it’s often advisable to put down as much as you can comfortably afford. You can use our car loan payment calculator to play around with down payment amounts, loan balances, and monthly payment calculations to see how much of an impact a down payment can make.

Ready to Get a Vehicle?

It’s not always easy to find a dealership that’s signed up with bad credit auto lenders. But here at CarsDirect, we want to make your search for a car loan easier with our nationwide network of special finance dealers. Dealerships in our network specialize in assisting borrowers with unique credit situations, and we want to connect you with one in your local area. Get started today by filling out our free auto loan request form.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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