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Personal Loans

Do You Need a Down Payment for a Personal Loan?

A down payment is an upfront payment you make when making a purchase with credit, such as a car or house. It helps shrink the total loan amount. 

Down payments are typically not required for unsecured personal loans because approval is based on your creditworthiness—you don’t need collateral to secure the loan. If you are asked for one, it could be a sign of a scam. However, there are legitimate times when it is required or beneficial. 

Here’s a closer look at when and if you need a down payment for a personal loan, and when a personal loan makes sense for you.

Do you need a down payment for a personal loan?

Type of loanDown payment required?
Unsecured personal loan
Secured personal loan
Auto loan

In general, you typically aren’t required to put money down for a personal loan. Personal loans differ from home mortgages or car loans because they’re unsecured debt, meaning they are not backed by collateral or need an upfront payment to secure the loan. 

Instead, lenders review your credit score, income, and financial history to decide if you qualify for the loan.

Even secured personal loans, which are backed by collateral, don’t usually require a down payment. Here is a closer look at the two types of loans.

Do you need a down payment for an unsecured personal loan?

You do not need a down payment for an unsecured personal loan. These loans are based on the borrower’s creditworthiness, not collateral. A lender assesses your credit score, income stability, and financial history in its loan decision. As such, it doesn’t need your assets as security.

If you have a good credit score and a stable income, you could get better loan terms like lower interest rates and a more manageable payment plan.

Do you need a down payment for a secured personal loan?

Unlike an unsecured personal loan, a secured personal loan is backed by collateral—such as a car, house, or savings account. If you default on the loan, the lender can take the collateral.

You don’t typically need a down payment for these loans, but cash can be used as collateral. Those looking to establish credit may need to put down some cash to secure the loan until they build up credit. 

A “pledged” investment account may hold significant cash or cash-equivalent items such as CDs, money markets, FDIC deposits, etc., in the account used as collateral. 

Secured personal loans are particularly beneficial for larger loan amounts or borrowers with lower credit scores. They often have lower interest rates than unsecured loans because they’re less risky for lenders. 

Is it a red flag if a personal loan lender asks for a down payment?

It can be a red flag if a personal loan lender asks for a down payment, but not always. Because personal loans typically do not require down payments, a lender asking for one can be a sign of a scam.

However, there are banks, lenders, and credit unions that offer secured personal loans, and they may put a hold on money in your account.

If a lender requests a down payment or any form of upfront payment labeled as a processing fee, application fee, or insurance before approving or disbursing a loan, exercise caution before proceeding. 

If you encounter something that seems like it could be fraudulent, verify the legitimacy of the lender by:

  • Checking with regulatory bodies: Visit the website of the appropriate regulatory body, such as the Consumer Financial Protection Bureau (CFPB) in the U.S. or the relevant state agency. These sites often provide a database where you can confirm the lender’s licensing status and check for any complaints or disciplinary actions against them. 
  • Reading reviews from other borrowers: When evaluating a lender, consult consumer review websites like Better Business Bureau (BBB), Trustpilot, or Google Reviews to read what other borrowers have experienced. Look for recurring themes in the reviews, both positive and negative, and observe how the lender responds to complaints. Be cautious of overly positive or vague reviews, as they may be fabricated. 
  • Checking social media and financial forums for more candid feedback: Explore platforms like X (formerly Twitter), Facebook, LinkedIn, and Reddit for unfiltered opinions and personal experiences with lenders. Look for discussions about the lender’s service quality, reliability, and any issues past borrowers have encountered. 

In case of suspicion, it’s advisable to report the lender to the appropriate authorities and seek loans from reputable sources.

Can you offer a personal loan down payment to help you get approved?

While personal loans don’t typically require a down payment, there are some exceptions to this rule. There are times when you may be asked for a down payment—or you may consider offering one—to help with your loan approval. You could be asked to pay a down payment or collateral if:

  • You have little or no credit. A personal loan lender might ask for a down payment for a personal loan to improve the loan’s terms, especially if you lack credit history. Putting money down could help you get a lower interest rate or better repayment terms since it lowers the risk for the lender.
  • The lender questions your ability to repay. If you have low or unstable income, or have a high debt-to-income ratio—the percentage of your income that is going to repaying debt—a down payment can help you get approved by showing you’re serious about repaying the loan and are financially stable.

Each personal loan lender has its requirements regarding if it requires or accepts down payments to help aid personal loan approval. Be sure to ask as you shop around and choose the right lender.

What types of loans require a down payment?

Certain types of loans, such as mortgages and auto loans, require a down payment. This upfront payment is part of the total purchase price and is paid at the time of acquisition. 

The down payment reduces the lender’s risk and often results in better loan terms for the borrower, like lower interest rates. Here’s a more detailed look at how down payments work for these types of loans:

  • Mortgages: The down payment is typically a percentage of the home’s purchase price. It directly increases your equity in the home, potentially lowering the loan-to-value ratio and improving loan terms.
  • Auto loans: Similar to mortgages, the down payment for an auto loan is a portion of the vehicle’s price paid upfront. This reduces the amount financed, thereby lowering monthly payments and the total interest paid over the life of the loan.

The table below illustrates how different down payment sizes affect the loan amount and total repayment on a $200,000 mortgage with a 30-year term and an interest rate of 4%:

Down payment amount$0$20,000$40,000
Loan amount$200,000$180,000$160,000
Monthly payment$955$860$764
Total repayment$344,000$309,600$275,040

Monthly payment is calculated using the standard formula for a 30-year fixed mortgage.

Total repayment reflects the total amount paid over the loan term, including interest.

This table illustrates how increasing the down payment decreases both the loan amount and the monthly payments, leading to significant savings on the total amount repaid over the life of the mortgage.