It’s common to apply for an auto loan and be required to put some money down to get everything rolling. But who gets the down payment?.
Where Does the Down Payment on a Car Go – To the Dealer or the Bank?
Some people need to make a down payment when they finance a new or used car from a dealership. People who are buying their first car or aren’t used to the process of getting an auto loan often wonder where the money from the down payment goes. Does it go to the dealer or the bank that is financing the loan?
In short the down payment goes directly to the car dealership selling the vehicle. It does NOT go to the bank or lender providing the car loan. Let me explain in more detail…
The Role of the Down Payment
The down payment serves a few important purposes
- It lowers the amount you need to borrow from the lender
- It shows the lender you’re financially committed to the vehicle purchase
- It reduces your monthly car payment
By putting a chunk of cash upfront, you lower the risk for the lender You have “skin in the game” and show you’re able and willing to pay for the car, not just depend on financing.
How the Dealership Uses the Down Payment
When you’re at the dealership ready to buy, you’ll negotiate the final sale price of the vehicle. Let’s say you settle on $20,000 for the car. If the lender requires a 10% down payment, you’ll need to put $2,000 down.
The dealership takes your $2,000 cash (or trade-in value) and applies it towards the purchase price. Your down payment lowers the amount you need to borrow. So now instead of financing the full $20,000, your loan will be for $18,000.
The down payment money stays with the dealer and goes straight into their bank account. This one-time payment helps them close the deal and gives them cash. From their point of view, it’s best to get paid right away, in full or in part.
The Bank Loan Process
Even though the bank that financed your loan doesn’t see or touch the down payment, the dealership does.
Here’s how it works:
- You get approved for a $20,000 loan from Bank XYZ
- The dealer’s sale price is $20,000
- Your down payment is $2,000
- The dealer keeps your $2,000 as partial payment
- You now only need to finance $18,000 through the bank
- Bank XYZ loans you the $18,000 directly to purchase the vehicle
With a down payment, you pay less to borrow from the lender in the end. The dealer is the only one who gets and holds the down payment money, not the bank.
What About Online Lenders?
In some cases, you may get approved for financing directly through an online lender before heading to the dealership. This changes the process a bit.
- You get approved for a $20,000 loan from Online Lender ABC
- The dealer’s sale price is $20,000
- Your down payment is $2,000
- The dealer keeps your $2,000 as partial payment
- You now only need to borrow $18,000
- The dealer contacts Lender ABC to complete paperwork for the reduced $18,000 loan
Again here, the lender never actually receives your down payment funds. Those still go to the dealership selling the car. The lender simply lends less than the full approved amount.
How Much Down Payment is Required?
The amount required for a down payment varies:
- 10% to 30% – Typical for buyers with poor credit
- 0% to 20% – Typical for buyers with good credit
The better your credit, the lower the down payment needs to be. Putting more money down is advisable if you want the lowest interest rate and monthly payment.
For example, putting 20% down on a $20,000 vehicle reduces the loan amount to $16,000 borrowed. That results in a lower payment and total interest paid than financing $18,000 or $19,000.
Key Takeaways
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The car dealership receives and keeps your down payment amount.
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The lender providing the auto loan does NOT get the down payment funds.
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Your down payment serves as a partial pre-payment to the dealer to lower the financed amount.
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A larger down payment results in better loan terms and lower monthly payments.
How Much Should I Put Down?
There’s an old car-buying rule called the 20/4/10 rule. It says that you should put down 20% of the car’s selling price, finance it for no more than four years, and that your monthly car payments, auto insurance, and other costs shouldn’t be more than 20% of your monthly income.
This old standby rule is falling out of practice lately, due to the rising price of new cars. However, the 20/4/10 rule has good roots that bad credit borrowers can learn from.
Heres how the 20/40/10 rule applies to financing:
20% Down – Benefits of a Large Down Payment
By having a substantial amount of cash to put down on a vehicle, you’re doing multiple things. First, you’re lowering your monthly payment. Secondly, you’re lowering your interest charges (which is very important to many bad credit borrowers). And thirdly, you’re increasing your approval odds because your total financed amount is less.
4 Year Term – Benefits to a Short Loan Term
Auto loans almost exclusively use a simple interest formula. As a borrower, this means the longer the loan term, the more you pay over time. With a simple interest formula, the amount of interest you pay is based on how much of the loan you still owe, the interest rate, and the length of the term. By choosing a shorter loan term, you’re saving money because you’re paying off your loan faster. If you’re expecting to get a less-than-ideal interest rate, consider a shorter loan term to lessen how much you’re going to pay the lender over time.
10% of Income – Monthly Vehicle Expenses
Expenses for vehicles include more than just the payment on your car. They also include the cost of gas, repairs, regular maintenance, tires, oil, and more. Don’t be a payment shopper and only care about your monthly loan payment. Don’t forget to think about all the other costs that come with owning a car. Also, keep in mind that if you finance your car, you have to have full coverage auto insurance, which usually costs around $100 a month.
Really, Though, How Much Do I Need Down?
As we said, putting 20% down on a car isn’t so common anymore. Many borrowers appear to be putting down between 10% and 15% on used and new vehicles nowadays. Borrowers that use our services have an average down payment of $2,066, according to data from our nationwide dealer network.
If your credit score is poor, you can expect to need at least $1,000 or 10% of the vehicle’s selling price to be considered for an auto loan. Sometimes, you’re allowed to put down whichever of the two amounts is less.
However, it’s often advisable to put down as much as you can comfortably afford. You can use our car loan payment calculator to play around with down payment amounts, loan balances, and monthly payment calculations to see how much of an impact a down payment can make.
People Who Make Down Payments and Think They Got a Deal
FAQ
Where does the money go when you put a down payment on a car?
A down payment is an initial, upfront payment you make towards the total cost of the vehicle. It could lower the amount that you’ll need to finance. Your down payment could be cash, the net proceeds from trading in a vehicle, or both. The more you put down, the less you’ll need to borrow.
Does the down payment go to the dealer or bank?
A down payment is a sum of money you give to the dealer upfront before buying a new car. While you don’t have to hand over a down payment, there are benefits to doing so. Many people turn to financing when buying a new or used car.
Does down payment go to lender or seller?
Your down payment is due at the time of closing and is the amount of money the lender requires to be paid from your own funds. The down payment is paid to the seller. Some state and federal programs could provide a grant or financing for your down payment and/or closing costs.
What does a down payment go towards?
It lowers the mortgage loan amount. If you put down a down payment equal to 20% of the home’s purchase price, the lender will only have to lend you 80% of the remaining purchase price. That’s less money they’ll be entrusting you to repay.