Personal Loans as Auto Loan Down Payments

Updated on April 9, 2024

At a Glance

  • A down payment is an upfront payment offering benefits like increased lender confidence, lower interest rates, and reduced loan payments.
  • It lowers interest by reducing the principal debt and decreases monthly payments, with the ideal amount depending on factors like credit score, car type, and affordability.
  • Personal loans can be used for down payment assistance, and the application involves three steps: apply, accept the offer, and repay the loan.

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 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.

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

6 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.

Spotlight Loans (Best for Bad Credit)

At Spotlight Loans, they believe in making auto financing accessible to everyone, even if customers have a limited down payment. Their flexible loan options come with low down payment requirements, ensuring individuals can get behind the wheel of their dream car without breaking the bank.

Spotlight Loans

4.8
Stilt rating
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

6.63% and up

Variable APR

N/A

Overview

  • Minimum credit score: n/a
  • Variable APR: 4.99% and up
  • Loan amounts: $100 – $5,000
  • Repayment: Depends on choice of lender

Qualifications

  • Be 18 years of age or older
  • Have a checking or savings account
  • Have regular income
  • Have a fair credit rating

Pros

  • Spotlight Loans is willing to work with individuals who have less-than-perfect credit, making it a viable option for those who may struggle to secure loans from traditional lenders​​​​.
  • Spotlight Loans offers same-day approval and funding, which is beneficial for those in urgent need of funds. This makes it a good option for emergency financial situations​​.
  • Unlike traditional payday loans, Spotlight Loans provides the option to repay the loan over a period of months, offering more flexibility in repayment planning​​​​.

Cons

  • One of the most significant drawbacks of taking a personal loan with Spotlight Loans is the potentially high interest rates. With APRs that can be much higher than traditional personal loan lenders, this can lead to substantial interest payments over time​​.
  • Spotlight Loans offers loan amounts that are relatively low, which may not be sufficient for all borrowers’ needs​​​​.
  • Spotlight Loans services are not available in all states, so it’s important to check if you reside in an eligible location before applying​​.

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.

AmOne Personal Loans

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

600

Fixed APR

3.99%-35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 600.
  • Fixed APR: 3.99%-35.99%.
  • Loan amounts: $1,000 to $50,000.
  • Repayment: 1 to 7 years.

Qualifications

  • Must be at least 18 years old.
  • Must be a U.S. citizen or permanent resident.
  • While there’s no specific income requirement, a consistent source of income is essential for the applicant.

Pros

  • Suitable for individuals with lower credit scores.
  • No cost for the matching service.
  • Attractive loan rates.

Cons

  • Acts as an intermediary, not a direct lender.
  • Risk of multiple contacts from prospective lenders.
  • Lack of clarity on lender details.

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.

Spring Loans Personal Loans

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Demonstrate a recurrent income.
  • Minimum age prerequisite: 18 years.
  • Validate U.S. citizenship status with an SSN.
  • Provide a legitimate U.S. driver’s license or a state identity card.
  • Establish a functional bank account for incoming deposits.
  • Adhere to any specific demands by the loan provider.

Pros

  • Open to applicants with any credit background.
  • Four-year loan period aids in structured financial management.
  • The $3,000 offer addresses several short-term financial challenges.
  • Wide-reaching eligibility criteria invite a broad spectrum of applicants.
  • The focus on dependable income over job title benefits varied income sources.

Cons

  • The set 27% APR is higher than many alternatives.
  • Restriction to a $3,000 loan might not cover all financial outlays.
  • Possessing specific IDs is mandatory, sidelining some applicants.
  • A prerequisite for an ongoing bank account may limit certain users.

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.

First Premier Lending Personal Loan

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%.
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Maintain a consistent source of income.
  • Must be at least 18 years of age.
  • Possess valid U.S. citizenship and a legitimate social security number.
  • Hold a current U.S. driver’s license or state-issued ID.
  • Keep an active bank account for direct deposit.
  • Satisfy any lender-specific criteria, such as credit rating, borrowing history, or place of residence.

Pros

  • No minimum credit score requirement allows accessibility for those with varied credit histories.
  • 48-month term provides clarity and allows for long-term financial planning.
  • Specific loan amount of $3,000 can meet many short-term financial needs.
  • Broad set of qualifications make the loan accessible to a wide range of people.
  • Emphasis on consistent income, not necessarily employment type, allows flexibility for borrowers.

Cons

  • A fixed APR of 27% is relatively high.
  • Loan amount is capped at $3,000, which might not cater to larger financial requirements.
  • Requirement of a U.S. driver’s license or state-issued ID could exclude some individuals.
  • Mandatory active bank account could be limiting for those who are unbanked.

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.

Upgrade Personal Loan

5.0
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

560

Fixed APR

8.49% - 35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 560
  • Fixed APR: 8.49% – 35.99%
  • Loan amounts: $1,000 to $50,000
  • Repayment: 3 to 5 years (7 years on some larger loans)

Qualifications

  • Possess an active bank account.
  • Able to provide a legitimate email address.
  • Minimum age requirement: 18 years (19 for Alabama residents).
  • Credit score of 600 or higher.
  • Annual income of $25,000 or more.

Pros

  • Willing to accommodate borrowers with a credit score as low as 560.
  • Offers flexibility with a range of loan amounts from $1,000 to $50,000. This can be suitable for both small and large financial needs.
  • Provides options for repayment, allowing borrowers to choose a timeline that best suits their financial situation.
  • Once approved, borrowers can access funds in just one day, which is useful for urgent financial needs.

Cons

  • Origination fees can go as high as 9.99%, which might add a significant cost to the loan.
  • Apart from the origination fee, there are fees for late payments and failed payments, which can add up if one is not careful.
  • While there is an option to extend repayment for larger loans up to 7 years, it’s not standard for all loan amounts.

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.

BestEgg Personal Loan

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

600

Fixed APR

8.99-35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 600.
  • Fixed APR: 8.99-35.99%.
  • Loan amounts: $2,000-$50,000.
  • Repayment: 3 to 5 years.

Qualifications

  • Targets borrowers with good to excellent credit; fair credit may qualify.
  • Minimum credit score of 600.
  • At least two years of credit history.
  • Minimum annual income: $3,500 from various sources like employment, alimony, and more.
  • Debt-to-income ratio: 40%, or 65% when including a mortgage.
  • Must be a U.S. citizen.

Pros

  • Soft credit check available for pre-qualification.
  • Offers a diverse spectrum of loan amounts.
  • Provides options for secured loans.
  • Direct payments can be made to creditors for debt consolidation.
  • Late fees are not charged.

Cons

  • Charges an origination fee.
  • Doesn’t offer rate discounts.
  • Initial payment date isn’t customizable.
  • Lacks a dedicated mobile app for loan management.

Read More

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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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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