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Personal Loans as Auto Loan Down Payments
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.
In most cases, lenders also require the borrower to put a down payment. This is for them to reduce their risk. It also helps more borrowers qualify for a loan.
Can You Use a Personal Loan for an Auto Loan Down Payment?
The short answer is, yes it’s possible. But there are a few important considerations.
While personal loans can be used for any purpose, using them for a car loan down payment is generally not advisable. Auto lenders often prefer down payments from personal savings, viewing it as a sign of financial commitment. A larger down payment can also indicate a higher likelihood of loan repayment.
If you lack the funds for a down payment, consider using the equity in your current vehicle as an alternative. Remember, personal loans are unsecured, meaning they don’t require collateral like a car or house. However, failing to repay a personal loan can lead to penalties, such as late fees or accelerated payment demands, and can severely impact your credit score and potentially lead to credit card closures.
Personal loans are a type of installment credit, requiring regular, fixed payments over time. In contrast, revolving credit, like credit cards, involves a flexible spending limit that can be reused as long as minimum payments are met. Defaulting on installment loans can result in collections and long-term negative impacts on your credit report.
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Do All Lenders Allow a Personal Loan for a Down Payment?
A few lenders may not want to allow that because you are already in debt. Many dealers would also advise you against using a personal loan for a down payment. You will have to make payments for 2 loans (one for an auto loan and another for a personal loan) which could become unsustainable.
Is it Possible to Get both a Personal Loan and an Auto Loan?
Using a personal loan for a car down payment can create complications. When applying for both a personal loan and a car loan, approval isn’t guaranteed for both. Lenders evaluate your debt-to-income ratio to decide your loan eligibility. Taking a personal loan for a car down payment will affect your credit record, and the car lender might perceive your debt as too high relative to your income. They could also be concerned about your capacity to manage multiple financial obligations simultaneously.
However, if your income is substantial and your credit score is strong, you might qualify for both loans. But this isn’t always assured. It’s risky to rely on a personal loan for a down payment without certainty of car loan approval, as it might jeopardize your ability to finance the car.
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 Equity – According 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.
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 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
5 Best Personal Loans for Down Payment on an Auto Loan
Securing an auto loan often requires a substantial down payment, and for many, coming up with this initial lump sum can be challenging. Personal loans can serve as a viable solution for covering this upfront cost, making vehicle acquisition more accessible. Here, we explore a range of lenders who offer personal loans suitable for use as auto loan down payments, catering to various credit backgrounds.
AmOne (Best for Okay to Good Credit)
AmOne is well-suited for individuals with okay to good credit scores looking to secure additional funds for an auto loan down payment. By connecting borrowers with a network of potential lenders, AmOne helps facilitate finding a personal loan with terms and rates that align with the borrower’s credit profile. This service is particularly beneficial for those who need extra assistance in meeting the initial costs of a car purchase.
Spring Loans (Best for Bad Credit and No Credit)
Spring Loans offers a supportive lending environment for those with bad credit or no credit history, making it a good option for potential car buyers in these categories. Understanding that credit challenges can be a major hurdle in securing funds, Spring Loans focuses on broader financial indicators to provide loan options. This approach helps individuals who might otherwise struggle to make the necessary down payment for an auto loan.
First Premier Lending (Best for Bad Credit)
First Premier Lending specializes in assisting individuals with bad credit. They offer a chance to secure a personal loan that can be used towards an auto loan down payment, even for those who have faced financial difficulties. With a personalized approach to lending, First Premier Lending evaluates each borrower’s situation to offer a loan that can facilitate the purchase of a vehicle.
Upgrade (Best for Good to Great Credit)
Upgrade is a prime option for those with good to excellent credit. Known for their straightforward loan process and competitive interest rates, Upgrade can provide a personal loan that makes the down payment on an auto loan more manageable. For borrowers with strong credit, Upgrade offers an efficient way to access the necessary funds for a car purchase.
BestEgg (Best for Good Credit)
BestEgg, catering to borrowers with good credit, provides an efficient route to securing a personal loan for an auto loan down payment. Their application process is quick and user-friendly, making it easy for borrowers to obtain the funds they need. BestEgg’s competitive rates and reliable service make them a favorable choice for individuals with good credit looking to cover upfront vehicle costs.
- Getting a Car Loan Without Credit History
- Car Financing With a New Job
- How to Remove a Cosigner from a Car Loan
- How to Get an Auto Loan Without an SSN
- Auto Loans For Non U.S. Citizens
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.