Many people veer away from financing a new car because they think that the down payment they will “need” will be more than they can afford at the time. However, this is a huge misconception. When buying or leasing a new or used car, you may not “need” a down payment at all.
All a down payment does is help to reduce your monthly payments. Many car dealerships offer Zero Down leasing options. Also, if you have good credit the lender you use for buying a car may not require a down payment. The difference between putting a down payment of around $2,000 to lease a new car would be about a $100 difference in your monthly payments.
A down payment should not be your main concern when deciding upon a car. Instead you should be asking yourself questions such as, “Do I want to lease or buy?”, “What is my credit score?”, and “What will my interest rate be?”.
Deciding on whether to buy or lease a vehicle is a tough decision. Here are some factors to consider:
|Who Owns It||You own your car – You may pay more in monthly payments, but in the end you own the vehicle and are able to trade it in if you chose. You gain an asset by buying your vehicle.||The bank or lender owns the car – Monthly costs may be less while leasing, but at the end of your lease you have to give your car back, you gain no asset while leasing a car.|
|Up-Front Costs||You may be required to come up with a down payment depending on your credit score and which lender you go through. .||Money down vs no money down leases. Putting money down on your lease will help to drop monthly payments but are not required. You usually do have to pay first month’s payment, a security deposit, and various other fees upfront when leasing.|
|Future Value||With safe driving habits and a regularly scheduled maintenance your vehicle should be in good condition by the time it is paid off and will be eligible for a decent trade in or selling value.||You will not get any future value out of a vehicle by leasing it, because the lender owns the vehicle. You may actually end up having to pay money when your lease is up depending on what condition the vehicle is in and if you went over your allowed mileage.|
|End of Payments||Once you make your last payment, you own the vehicle. The bank or lender will send you a lien release and your title as proof you own it.||Once you make your last lease payment you will have two options. 1. Return the vehicle or 2. You may now purchase the vehicle either upfront with cash or go through the car buying process now. (Make sure to talk about your options before you have to make your last lease payment.|
Now that you know the difference between buying and leasing a car it is time to talk about your credit score and what it can do for you when it comes to financing a vehicle. Your credit score can end up being the determining factor of whether or not you need to pay a down payment, it can also determine the actual cost of the vehicle, and it will have a major impact on how big of a loan you can take out, and what the interest rate on that loan will be.
740 – 877 = A+ Credit Tier: preferred interest rate, zero down loans, larger loan approvals
700 – 739 = A Credit Tier
660 – 699 = B Credit Tier
581 – 659 = C Credit Tier
520 – 580 = D Credit Tier
250 – 519 = F Credit Tier
For more information about credit tiers and how auto lenders use them, click here.
If you do not know your credit score, and would like to, click here or visit a site such as www.creditkarma.com. Keep in mind that if you check your score more than once in a row or often enough, that it may actually hurt your score.
I hope that this blog post answered any questions you may have had regarding what kind of down payment is “needed” to finance a car. If you have any more questions or comments please comment below.