Do I Need a Down Payment to Finance/Lease a Vehicle?

Do I Need a Down Payment to Finance/Lease a Vehicle?

For many people looking to purchase or lease a new vehicle, one question that looms large is "Do I need a down payment?" It is not always easy to come up with thousands of dollars in cash, especially if the need for a new vehicle was unexpected. Here are some things to think about in terms of a down payment on a used or new car.

What is a down payment?

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A down payment is the amount of money that is initially put toward the purchase price of, in this case, a car. There are sometimes down payment requirements in terms of a percentage (for instance, mortgages often require a 5% or 20% down payment) to meet financing guidelines.

Is a down payment necessary?

Down payments are not always required when purchasing or leasing a vehicle. They are recommended, because they bring down the monthly payment and offset some depreciation, but most financing and leasing plans can be obtained without a down payment.
However, there might be a down payment requirement in order to meet financing terms for car purchases or leases. This is often the case for special deals, such as 0% financing or low monthly payment leases.
In addition, buyers with lower credit scores might be required to put down a higher amount of cash on a purchase or lease. This is because a lower credit score makes someone a riskier investment for the financing company--a higher down payment offsets that risk.

When is a down payment recommended?

A down payment is usually recommended for purchasing a vehicle. There are a number of benefits to doing so, including getting a better interest rate, lowering the monthly payment, minimizing interest charges, and avoiding being upside down on the loan in event of the total loss of the car or need/want to trade in the vehicle.
For those worried about fitting a car payment into a monthly budget, a down payment should be large enough to bring down the monthly payment to amount that is easily affordable. On the other hand, buyers could put down a larger amount and still pay a higher monthly payment, allowing the loan to be paid off more quickly.

When is a down payment not recommended?

Down payments are recommended for car purchases, but leases are another story. If someone has a good credit score and is looking to lease a vehicle, a down payment might make very little difference in monthly payments and interest charges. This is especially true if the vehicle is modestly priced, if it has a good interest rate, and the lease term is short.

Determining the right down payment

Used car purchase and lease down payments can be difficult to determine. While large down payments are usually recommended for purchases and not leases, it really is a personal choice and varies from person to person and vehicle to vehicle. In the end, if someone has additional cash lying around, it does not hurt to pay extra on a vehicle purchase or lease to lower monthly payments, reduce interest charges, and shorten the loan or lease term.

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