There is no set minimum down payment that fits every situation. Sometimes 10% is required, sometimes 20% or more, sometimes a set amount like $500. In rare cases, you can get 0% APR by way of a special incentive. It really depends on your credit score, your dealer, and the vehicle you want to buy. In general though, 10% is an acceptable minimum. That said, there are a few guidelines that you can keep in mind while you are shopping for your next vehicle.
The first thing to keep in mind is the loan-to-value (LTV) ratio. Lenders want to keep the loan between 85 and 115 percent of the value of the vehicle purchased. The lower your credit score, the lower the LTV must be. The lower your LTV, the higher your down payment, because you will be financing less of the overall price of the vehicle–the difference being made up by a down payment.
Credit Score Impact
Secondly, your down payment may hinge on your credit score. While many automakers offer zero down incentives, you may need to have a credit score in excess of 700 in order to qualify. Also, these deals aren’t always what they’re cracked up to be, because you typically have to forfeit any cash back rebates. When you have a credit score between 650 and 699, you may need to offer 10 percent of the total purchase price in a combination of cash and trade. Between 600 and 649, you may be asked for twenty percent down in cash only. If your score falls under 600 all bets are off. Some lenders require as much as 50 percent down for the lowest scores.
Determining What You’ll Owe
The only real way to determine what kind of down payment will be required is by submitting an application and speaking with a lending specialist. Most likely, they will be able to give you different down payments for different scenarios (vehicles), or find you a dealer who will accept your trade-in if you have one.
Why Down Payments are Important
The last consideration is centered around repaying the loan. A larger down payment lowers your monthly payments and saves you money in total interest paid over the life of the loan. For instance, if you borrow $15,000 for four years and have an interest rate of ten percent, you would pay $380.44 per month and a total of $3,261.06 in interest over the life of the loan. By offering 10 percent down, your payments would drop to $342.39 and you would only pay $2,934.95 in total interest.