It’s good practice to make a down payment of at least 20% on a new car and 10% for used. A larger down payment can also help you qualify for a better interest rate.
But how much a down payment should be for a car isn’t black and white. If you can’t afford 10% or 20%, the best down payment is the one you can afford. Key takeaways
Putting money down on a car is a common practice when purchasing a new or used vehicle. However with the average new car price now over $48,000 coming up with a 20% down payment can be difficult for many buyers. You may be wondering if it’s really necessary or wise to put a chunk of cash down when financing a car. There are good arguments on both sides of this issue.
Why Putting Money Down Is Wise
Here are some of the key benefits of making a down payment on an automobile:
Lower Monthly Payments
A higher down payment reduces the amount you need to borrow, which leads to lower monthly payments. For example on a $30000 loan at 6.6% APR for 4 years, a $3,000 down payment drops the payment from $713 to $642 per month. Lower payments free up room in your budget and make the loan easier to manage.
Less Interest Paid
With a larger down payment, you pay interest on a smaller loan balance. In the example above, the total interest paid drops from $4,216 with $0 down to $3,584 with a $4,500 down payment. That’s a savings of $632 in interest charges.
More Equity From the Start
A down payment immediately builds your equity in the vehicle. Equity is your ownership stake, equal to the current value minus the loan balance. With little or no down payment, you may end up underwater on the loan, owing more than the car is worth. The down payment cushion helps prevent this.
Potentially Better Rates
Some lenders may offer a lower interest rate if you make a sizeable down payment. It shows them you can handle your finances responsibly. Just keep in mind your credit and income also influence rates.
Easier Approval
Lenders often want 10-20% down to approve a loan, especially for borrowers with lower credit scores. Coming up with the down payment boosts the chances your application will get the green light.
Why Putting Money Down May Not Be Wise
Now let’s look at some potential drawbacks of down payments:
Ties Up Your Cash
Handing over $5,000 or more to the dealer means you no longer have access to that money. It may be wiser to hold on to any extra cash for emergencies or other needs.
Alternative Options Exist
You can sometimes get approved for a car loan with little or no down payment, especially if your credit is good. Manufacturers often subsidize 0% deals.
###GAP Insurance Helps
If you’re concerned about owing more than the car is worth, GAP insurance will cover the difference in the event of a total loss.
Interest Savings Take Time
It takes a while for the lower monthly payments and interest savings from a down payment to add up and pay off. Breaking even may take 2-3 years.
Depreciation Hits Hard
Even with a large down payment, rapid depreciation in the early years can leave you upside down on the loan. This is especially true if you finance for 6 years.
Investment Returns May Be Greater
Rather than tying up $5,000 in a down payment that earns you no interest, you could invest it and potentially earn 5-10% yearly. That return outpaces auto loan interest rates.
Key Factors to Consider
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Credit score – Borrowers with lower scores often need larger down payments for approval or the best rates. Those with excellent credit can sometimes qualify for 0%.
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Loan term – Longer terms of 6-7 years mean depreciation is more likely to leave you owing more than the vehicle is worth.
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Interest rate – If you can snag one of today’s lowest rates below 3%, the savings from a down payment shrink.
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Future plans – If you plan to drive the car for many years until paid off, a down payment makes more sense than if you switch cars frequently.
The Bottom Line
Down payments have benefits but also drawbacks to weigh. A 20% down payment is ideal if you can swing it, but 10% is also reasonable. Work within your budget. With good credit, you may qualify for financing with little or no down payment. Do the math to make sure the long-term savings outweigh tying up your cash.
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Take advantage of your trade-in
You might already be planning on applying your trade-in vehicle toward your down payment. Check how much your car is worth and know your trade-in value before going to the dealer. Then, you’ll know to walk away if the dealer proposes a bad deal.
You could also sell your car to a private party and use that money for your down payment. Private party sales tend to get you a higher price than trade-ins do, but finding a buyer can be a hassle.
How to calculate a car down payment
To calculate a car down payment, multiply the purchase price by the percentage you plan to put down. For new cars, use 20%, and for used cars, use 10%.
For example, let’s say you’re planning on buying a new car for $34,582. In that case, you should try to put down $6,916.40, or $34,582 x 0.20.
If it’s the other way around and you know how much you can put down but aren’t sure how much car you can afford, use our auto affordability calculator.
How To Make A Smart Car Purchase
FAQ
Is it smart to put money down on a car?
Borrowing less and putting more down on a car builds equity sooner, incurs less interest, and results in lower monthly payments.
What are the disadvantages of a down payment on a car?
What Are the Disadvantages of a Large Down Payment? Providing more money down doesn’t guarantee a lower interest rate, and it can cut into your savings.
How much down payment should I put on a $30,000 car?
A down payment between 10 to 20 percent of the vehicle price is the general recommendation. But if you can afford a larger down payment, you can save even more money on interest payments over the life of the loan. By dropping the amount financed, you save some even before you start negotiating the car price.
When should you not put money into a car?
The time to give up and stop putting money into it is when the cost of maintenance, repair, and fuel is higher than the cost of a new (to you, meaning used) car per year.