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?
When buying a new or used car from a dealership and financing it, you’ll likely need to make a down payment. But where exactly does that down payment money go – to the dealer or the bank financing the auto loan? This is a common question for first-time car buyers and anyone new to the auto financing process.
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 dealer keeps the down payment amount – it goes straight to their coffers. This lump sum helps them make the sale and puts cash in hand. From their perspective, getting paid immediately in full or partially is ideal.
The Bank Loan Process
While the dealership gets the down payment, the bank financing your loan never sees or handles that money.
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
So in the end, the down payment reduces the amount you borrow from the lender. The bank doesn’t receive or hold the down payment funds – only the dealer does.
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 states you should put down 20% of the vehicle’s selling price, finance the car for no more than four years, and that your loan payment, auto insurance costs, and monthly vehicle expenses shouldn’t be higher than 10% 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. A simple interest formula means your interest charges accrue based on your remaining loan balance, rate, and 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
Vehicle expenses don’t just include your car payment – it includes your auto insurance premium, cost of gas, repairs, regular maintenance, tires, oil, and more. Don’t be a payment shopper and only care about your monthly loan payment. Be sure to consider all the other costs of owning a vehicle, and remember that you’re required to have full coverage auto insurance when you finance, which is typically 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 make a down payment that’s 20% of the home’s purchase price, the lender only has to lend you 80% of the purchase price. That’s less money they’ll be entrusting you to repay.