Personal Loans as Auto Loan Down Payments

Posted by Frank Gogol

Disclosure: Stilt is a lending company that offers personal loans that may be used as auto loan down payments. Nonetheless, we are committed to recommending the best loan products to our readers when their needs are outside Stilt’s loan offerings. 

Simply put, most people cannot afford to buy a car outright. Credit scoring company Experian reported that half or more car buyers use loans to finance vehicles and when the vehicle is new, that statistic becomes most.

“Nearly 90% of new car buyers and more than 50% of used car buyers take out a loan to finance their purchase.”

Using an auto loan gives you the flexibility to purchase a car now and pay for it over time, making the purchase more reasonable for the buyer in the short term. But, with that flexibility comes loan interest, which can add up over the years, so many people put a down payment on the loan to reduce the overall cost and long term.

What is an auto loan down payment? How large should a down payment be? Can you use a loan to cover the down payment on an auto loan? These are all questions many car-buyers have and their answers hold important information that will help you make better financial decisions when buying a car.

What Is a Down Payment?

A down payment is an upfront payment made when a large purchase is made on credit. As the buyer, it’s your responsibility to cover this cost, but it offers a number of benefits, including:

  • Increased lender confidence in your financial security
  • Decreased interest rate, saving you money
  • Decreased loan payments, saving you money.

A down payment typically constitutes a certain percentage of the overall price, and in most cases, it is non-refundable in nature—if the deal fails to materialize. After making the down payment, the buyer has to make financing arrangements to cover the balance amount—usually by taking out a loan.

How a Down Payment Affects Interest?

A down payment lowers interest by reducing the principal debt. If your interest rate is 10%, your annual interest will be less or more depending on how much your principal is. For example, if your loan is for $10,000 at a 10% interest rate:

$10,000 x 10% = $1000

But if you make a $2,000 dollar down payment and reduce your principal to $8,000, it would change your annual interest total:

$8,000 x 10% = $800 

By making a substantial down payment upfront, you can save a significant during the life of the loan. On top of that, some lenders offer a lower interest rate to customers who make higher down payments.

To learn more about interest, click here.

How a Down Payment Affects Monthly Payments?

Besides decreasing the interest, down payments can also play an important role in reducing the monthly repayments. Let’s go back to the previous example to illustrate the point:

$10,000 (principal) + $1000 (interest) = $11,000 (total owed)

So if the total amount owed between principal and interest is $11,000, your monthly payments would look like:

$11,000 (total owed) / 12 (months) = $916.67 (monthly payment)

A $2,000 down payment, however, would alter the math significantly in your favor:

$8,000 (principal) + $800 (interest) = $8,800 (total owed)

Which would make your monthly payment:

$8,800 (total owed) / 12 (months) = $733.33 (monthly payment)

In other words, you are making a net saving of $183.34 every month. By the end of the loan term (12 months), you will eventually make a total saving of $2,200.

As is illustrated above, making a down payment on your auto loan can be very beneficial. But what is the right amount to put down on your auto loan?

How Much Should a Down Payment on a Car Be?

How much money should you put down on your car loan? The experts at Experian suggest a 20% down payment—or one-fifth of the total value of the car. Many people, however, find it difficult to afford that large a down payment. But if you are able to pay that much upfront (or close to it) it could be very beneficial for you in the short and long-term.

Benefits of an Auto Loan Down Payment

Lower Interest Rate – As mentioned above, a down payment means there is a good chance you will get a lower interest rate on your loan. A large down payment makes you a safer bet for the lender, which often means you will get a loan with a lower APR.

Lower Monthly Payments – Paying money down on your car means your monthly payments will be lower as well. Say you get an auto loan for the amount of $25,000 over two years with 4 percent APR. If you were to put 10 percent down ($2,500) you would pay an average of $414 per month. Having a lower monthly payment makes it easier to deal with any unexpected expenses, like car maintenance costs, that might come up.

Great EquityAccording to Investopedia, equity is the difference between how much you owe on your loan and how much your car is actually worth. Having negative equity (also called “being upside-down” on your loan) is when the loan amount is more than the actual value of your car. A substantial down payment helps keep your equity positive. A payment of 20 percent is a good figure because a new car is expected to depreciate 20 percent in the first year of ownership.

Manageable Debt Levels – The higher your down payment, the lower the total amount in your auto loan. The lower your auto loan, the less debt you are committing to taking on. Keeping your debt at manageable levels gives you freedom, keeps your credit score higher. And if your credit score is currently not-so-great, managing an auto loan successfully is a great way to improve your credit.

High Chance of Loan Approval – A large down payment also significantly improves the chances of your loan application being approved. If you have a poor or below-average credit history this can make the difference between being approved or not. And if you have no credit history and are a first-time car buyer, you can also have trouble getting a loan application approved. For those without a credit history, a down payment can also make an important difference.

How to Determine Your Down Payment

So, what do you do if you are unable to come up with the money for a down payment on your auto loan? Or, what if all the financing packages you are offered come with a hefty down payment you can’t afford? Well, one option is to secure a personal loan to pay for some or all of the money required upfront. Most personal loans are unsecured (meaning you won’t have to put up collateral to get the loan) and can range from $1,000 all the way up to $50,000. A personal loan is one way to enjoy the benefits listed above without breaking the bank with a large down payment.

Figuring Out How Much Down Payment is Enough?

Many customers looking to buy a new car through a loan have this important question in mind – “How much of a down payment should I make?”

As a rule of thumb, the greater the amount of the down payment, the higher the amount of money you will save. While that’s the general consensus, everyone’s financial circumstances are different and your ideal down payment will depend on yours. Luckily, there are steps you can take to determine the appropriate amount of down payment in your case.

Step 1: Get Your Credit Report

The first step in figuring out your ideal down payment amount is to get a free copy of your credit report from one of the three major credit bureaus at AnnualCreditReport.com. Next, review your credit report for discrepancies and immediately any found to the credit bureaus as it can potentially affect your credit score. A higher credit score (670-850) gives you more negotiating power to demand a lower rate of interest on your car loan. Some of the lenders may even offer you a 0% down payment option. On the other hand, if you don’t have a decent credit score( >669), then your loan options will be limited and you may have to provide a larger down payment.

Step 2: Decide If You’re Getting a New or Used Car

The type of car you are looking to buy, either new or old, will have a bearing on the down payment. You can typically borrow a greater amount on a new car–sometimes up to 100% financing if you possess a healthy credit score. On the other hand, lending companies are more apprehensive about your financial capability when you are buying an old car. As a result, they may demand a higher down payment to reduce the risk of default on the part of the customer.

Step 3: Figure Out How Much You Want to Put Down

The most important thing, for you as a buyer, is to figure out what amount you can actually afford without stretching yourself to the extreme limit. While you would always like to make a higher down payment, it’s critically important to ensure that it does not jeopardize your financial well-being. You are ultimately the best judge of your finances and an honest assessment can reveal your ability to afford the additional financial burden. Failure to repay your loan on time can adversely impact your credit health, so it’s crucial for you to be fully aware of your current financial resources and obligations.

Personal Loans and Down Payments

One strategy for making a larger down payment is to use car loan down payment assistance like personal loans rather than money out of your own pocket. The benefit of a personal loan is that it’s relatively simple to get approved for a loan for a few thousand dollars while getting an attractive interest rate.

Warning: When taking a personal loan for an auto down payment loan it’s important to recognize that you are, in effect, taking two loans instead of one and that you must proceed accordingly and only if it is financially wise.

To learn more about personal loans, click here

3 Simple Steps to Applying for a Down Payment Loan

If you are considering applying for a personal loan for a down payment, just follow these 3 simple steps.

Apply

Apply online for the loan amount you need. Submit the required documentation and provide your best possible application. Stronger applications get better loan offers.

Accept

If your application meets the eligibility criteria, the lender will contact you with regard to your application. Provide any additional information if required. Soon you’ll have your loan offer. Some lenders send a promissory note with your loan offer. Sign and return that note if you wish to accept the loan offer.

Repay

The loan then gets disbursed into your U.S. bank account within a reasonable number of days (some lenders will be as quick as 2-3 business days). Now you need to set up your repayment method. You can choose an autopay method online to help you pay on time every month.

Personal Loans
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Loans for up to $35,000. No cosigner required. No prepayment penalty.

Conclusion

A substantial down payment on your new car—up to 20 percent of the total price—has any number of benefits. It helps you manage your debt, means you pay less money overall, and can even decrease the interest rate on your loan. Unfortunately, many people don’t have the amount of ready cash on hand in order to afford that kind of payment. If you are a visa holder, you might struggle with this in particular, as many lenders already consider you high-risk. You may very well struggle to get loans or get loans with terms that work well for you.

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