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Does a Car Loan Cover Down Payment?

A car loan rarely covers the down payment on a car. If it did, you would effectively have a loan balance that would be more than the value of the vehicle financed.

Why a Down Payment is a Good Idea

  • Approval:  It is not wise to purchase a vehicle without a down payment for several reasons. Number one is the higher risk of your loan being denied. A loan balance that is in excess of 100 percent of the value of a vehicle is very risky for a lender. All lenders are risk adverse, so will most likely deny nearly any loan applications under those circumstances unless you have a perfect credit score.
  • Monthly Payments:  Second, if you did finance 100 percent of the purchase price of a vehicle, your monthly payments would be higher. Consider the payments for a $10,000 vehicle financed at 8 percent for 48 months. When financed at 100 percent, the monthly payment would be $268.54. With just ten percent down, the payment drops to $241.69, and with twenty percent down the payment drops to $214.83.
  • Negative Equity:  Third, 100 percent financing leads to negative equity. Say you get a $10,000 loan for a $10,000 vehicle. A new car loses 20 percent of its value straight away. That means the second you leave the lot, you will owe $10,000 on a car worth $8000. If you want to trade it in, you will be on the hook for the difference, known as a “deficiency balance.”
  • Total Interest:  Lastly, the total amount of interest that you pay will be quite a bit more. Consider the loan mentioned above. Financing the total purchase price forces you to pay $1,890.02 in interest. Ten percent down drops that to $1,701.02 and twenty percent takes it to $1,512.02.

Although a car loan can techically cover your down payment, it does not make very good financial sense unless you have stellar credit, a high tolerance for negative equity, and plan to drive the vehicle until it’s fully paid off.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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