The size of the down payment that you will need for a car depends on several factors, the main one being your credit history.
- If you have good credit, a down payment may not be required at all. Let’s say your credit is in the prime range, but not excellent, you may only need 5 percent as a down payment. With either of these credit ratings, the down payment could be either cash or trade-in value.
- Once you slip into the fair/average credit category, you may need up to ten percent as a down payment. That amount could still be cash, trade, or in the form of manufacturer rebates.
- Should your credit score lie in the bad category, you will need 10 percent of the purchase price in a combination of cash, trade, or rebates. If you have cash only, you will need at least $1,000.
- For those individuals who have horrible credit and need a car, you will need at least 20 percent of the purchase price in cash only. You will not have the option of using trade and rebates to meet your minimum down payment requirements.
Minimum versus Ideal Down Payments
Please keep in mind the following two things about the above down payment requirements:
- They are only approximations. Each lender/dealer has their own requirements.
- They are minimum down payments. NOT the ideal amount for your given purchase.
Vehicles are subject to steep rates of depreciation, as you surely know. A down payment helps to compensate for this loss in value, so that you don’t end up owing significantly more on a vehicle than it’s worth. If you finance 100% of a vehicle’s worth, after a month or two it will only be worth 80% of what you paid, but you will still owe a lot more than this. If you decide to sell the vehicle, or it’s repossessed or totaled, you could end up several thousand dollars short of paying off the loan. The amount you still owe is known as a deficiency balance, and it is rarely forgiven by the lender. A down payment also minimizes how much you’ll pay the lender in financing fees (interest), because you’re borrowing less. After all, a smaller loan equals less interest.