It goes without saying that you should always offer a down payment of some kind when you buy a car. A down payment lowers the loan-to-value ratio (LTV) of your loan–the amount you borrow versus the price of the vehicle–which does two things for you:
- Lowers your interest rate.
- Reduces the total interest you pay.
- Minimizes negative equity.
Now, whether $1,000 is a good down payment for a car or not depends on the total purchase price of the car. Typically, $1000 is a good down payment for a car costing up to $10,000.
The Rule of 10% Down
A good rule of thumb is to offer 10% of the total purchase price as a down payment. So, if you are looking at a car that costs $25,000, a down payment of $1,000 would not be enough–it would only be 4%. Offering a higher down payment is going to save you money in interest over the life of a loan. Look at the $25,000 mentioned above. We will assume a 60 month note at 5 percent. If you offer $1,000 down, you will pay $3,306.85 in total interest. When you offer 10 percent down, you only pay $2,976.17 in total interest and your monthly payment drops by about $50 a month.
Credit Score versus Down Payment
Depending on your credit score, you may not be able to find financing for a vehicle with just $1,000 down. Zero to $1,000 will be enough of a down payment if you have a credit score higher than 680, but anything lower may require a higher down payment. Once your score dips under 680 you will find yourself looking at needing a down payment of 10 percent in cash, trade, or a combination of both. Under 620 and you may need to offer as much as 25 percent of the total purchase price of a vehicle. Dip under 580 and you may be asked for 50 percent as a down payment or be forced to look for a buy-here-pay-here dealership, which is far from ideal. BHPH dealers charge mega-high down payments, and the interest rates typically border on the state’s maximums allowable.