A down payment is one of the best things you can contribute when you need an auto loan. By putting money down, you can control the success of your loan in many ways. Let's look at three of the top reasons you should use a down payment on your next car loan.

1. Use a Down Payment to Save Money

3 Reasons to Use a Down Payment on an Auto LoanBecause a down payment typically involves handing a large check or lots of cash to a dealer, it may not seem like you're saving anything at all. It can often be tough to hand over a large amount of money all at once, but in the case of an auto loan down payment, it's well worth it.

When it comes to down payments, you have to spend to save, and the more you spend, the more you save. A larger down payment on a car loan means you're borrowing less. A smaller loan leads to a lower monthly payment. A smaller loan also offers the second reason to use a down payment: lower interest charges.

2. Use a Down Payment to Lower Interest Charges

Interest is the cost to borrow money, and it accrues daily based on the loan balance. So, the less you borrow, the less interest you are charged, which can save you hundreds – possibly thousands – of dollars in interest charges over the term of your loan.

By using a down payment, you can control how much you pay in interest charges. If you want to save more down the road, put more money down up front.

3. Use a Down Payment to Help With Equity

When you get an auto loan, it's easy to start out in a negative equity position, especially if you're financing a new vehicle. This is because all cars depreciate, and they generally lose more than 10% of their value as soon as you drive them off a lot. Due to this, the vehicle’s value falls below the loan balance – this is negative equity, or being upside down on your car loan.

Negative equity occurs when you owe more on your auto loan than your vehicle is worth. One easy way to fight this, or at least reduce the time you spend with negative equity, is to have a substantial down payment.

Typically, lenders that work with poor credit consumers require a minimum down payment amount of $1,000 or 10% of a car's selling price. However, if you want to offset the effects of negative equity on your auto loan, you may need a down payment of at least 20% of the vehicle's selling price.

Additional Down Payment Information

As you can see, a down payment comes with some great benefits. But all benefits come with drawbacks, right? In the case of a down payment, the drawbacks have more to do with not having one.

One thing that catches many people off guard is having to come up with the money for a down payment. This may seem inconvenient, or even an impossible task. Rest assured, it's not impossible to save up for a down payment, but if you're having trouble, you should know that you may not have to hand over a lump sum in cash to get it done.

If you don't have the cash to put down on your next car loan, you can use the equity in a current vehicle as a down payment by trading it in. If there's enough equity in your trade, you may even be able to use it as a down payment and pocket some extra cash. If the equity in your current car is more than the down payment requirement, you could also put all the money you get from the trade-in toward the down payment to help save you even more on your new loan.

If you aren't able to get enough for your trade-in to cover the entire down payment, you can combine the trade equity with cash to come up with what you need. In rare cases, you may even be able to put some of your down payment on a credit card, though you should be careful because you're going to be paying interest on your credit card, too, which increases your total debt.

One requirement for a down payment that you have to keep in mind is that it must be your own money. Lenders use a down payment as a way to gauge how willing you are to invest in your own success. This means that you can't take out a personal loan for a down payment.

Make the Most of Your Down Payment With the Right Auto Loan

When it comes to your next auto loan, be sure and prepare ahead of time so that you have an easier time covering the down payment requirement you're going to have. If you're a bad credit borrower, a down payment is usually required, though the amount needed varies by lender.

Once you're ready to look for your next loan, Auto Credit Express wants to help. We work with a nationwide network of special finance dealerships that have the lenders available to work with people in challenging credit situations. To get started right now, simply fill out our fast, free, and easy auto loan request form. After you do, we'll get to work matching you with a dealer in your area.