No, it is not illegal for car dealerships in the United States to require a down payment when selling a vehicle, even if the purchase is being financed with a loan.
Down payments on financed vehicles are a common and legal practice.
Key Points About Down Payments on Financed Vehicles
- Car dealerships are allowed to require down payments on vehicle purchases, including those that are financed with a loan. There are no laws prohibiting this.
- Down payments help reduce the risk for lenders by ensuring the buyer has some equity in the vehicle right away. Lenders may require a certain down payment amount in order to approve financing, especially for buyers with lower credit scores.
- The down payment amount should be clearly listed on the vehicle purchase or lease contract. Failing to properly disclose deferred down payments on the contract may violate disclosure requirements in some states.
- Claims circulating online that down payments on financed vehicles are illegal are false. These claims have no basis in actual lending laws or regulations.
Related Articles to Read:
- How Much Are Dealer Fees and How to Avoid Them
- How Long Does A Car Dealership Have To Get You Financed
- Can You Negotiate Car Price After Putting Down a Deposit?
- What Are Possible Red Flags or Signs of a Scam When Buying a Car
Why Lenders and Dealers Want a Down Payment
Most people are under the impression that dealers and lenders ask for a down payment simply because they want some cash upfront.
The truth is that the down payment is a lender’s strategic way of making sure you have equity in the car from day one.
This makes it less likely you would risk defaulting on the loan because not only would you lose your car, but you would lose all the money you put down as well.
The Benefits of Making a Down Payment on a Car Loan
The benefits of making a down payment include:
- Reducing the total amount financed, which means paying less in interest over the life of the loan
- Building immediate equity in the vehicle, so the loan is less likely to be underwater
- Potentially qualifying for a lower interest rate by reducing the lender’s risk
- Having a lower monthly payment by financing a smaller amount
The Bottom Line
Requiring a down payment when financing a car is a standard practice in the auto industry. As long as the down payment is properly disclosed on the sales contract, it is legal for dealerships to collect money down on an auto loan.
