The Lowdown on Down Payments
Down payments usually apply to major purchases. Examples include things like expensive home furnishings, new or used vehicles, and real estate. Most people don’t have the means to pay for these purchases in cash and instead choose to finance them with a loan.
When financing purchases like cars and homes, borrowers usually offer a small percentage of the purchase price up front. This initial payment is known as a down payment. According to Kelley Blue Book, car buyers usually offer at least 10% of the vehicle’s sale price as a down payment.
Why Do Lenders Ask for Down Payments?
Every loan carries risk, and lenders need to mitigate these risks. Otherwise, they risk being run out of business by issuing bad loans. If even a slight disproportion of borrowers default, the lender’s entire financial situation can destabilize.
Down payments invest borrowers more deeply in the loan, since they prompt consumers to pony up their own money. Thus, they mitigate risk for lenders. Down payments also reduce lender losses in the event of a borrower default.
What Is a “No Money Down” Auto Loan?
A no money down auto loan is a car loan that does not require the borrower to offer a down payment. They liberate the borrower from the need to plunk down thousands of dollars in cash up front.
However, that convenience comes at a cost. Borrowers who finance 100% of the vehicle’s purchase price pay more interest over the life of the loan.