How Big Should My Car Down Payment Be?

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Whether you’re buying a new or used car, if you’re financing the purchase, you’ll have the option of putting down money. A down payment reduces the total amount you will owe on the car, though a good down payment for a car will depend upon the car’s total purchase price.

Not all lenders will require a down payment, however. Many used car dealerships advertise “no money down” deals, and you may think it would be great to keep some money in your pocket. But not so fast. Here’s why you should ask yourself how much to put down on a car, rather than how little.

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Why Make a Down Payment?

When deciding how much to put down on a car, take into account these benefits of a down payment. To have access to the best auto loans, you’ll need a great credit score or significant down payment.

If you’re buying a $15,000 car and putting down $5,000, your monthly car payment will be less than if you financed the whole amount. If you’re someone whose monthly cash flow varies, or who struggles to stick to a budget, this could be a good choice. Paying a larger percentage of the total price as a down payment will greatly help you in the long run.

It Helps You Secure a Loan Despite Lower Credit.

The lower your credit score, the more you’ll pay to access credit. If you have a credit score below 600, your car loan will come with a high interest rate. Before going to a dealership, find a lender who specializes in bad credit auto loans if your credit score is under 600.

A good down payment for a car reassures the lenders that you’re serious about the purchase and will make payments. It also reduces their risk, as they’re not lending as much on the vehicle. Reduced risk, in turn, lowers your interest rate.

It Makes Financing Faster.

Cars start losing value the moment you drive off the lot. If the vehicle is 100% financed, and you then default on the loan, the lender would now have to repossess an asset that has lost value. They may not be able to sell it for their total loan amount and recoup their losses.
If you’re willing to put a down payment on the car, the financing process will go easier and faster. The lender takes on less risk when you put money down.

It Offsets Depreciation.

Cars rapidly depreciate over their first few years of ownership. If you’re buying a new car, it will begin losing value immediately. This could lead to a gap in your insurance.

This gap is the difference between what you owe on the car and what its worth if totaled in an accident. Without a down payment, you could wind up owing the lender money for a now-worthless car. If you’re deeply concerned about this fact, talk to your insurance agent about purchasing gap insurance.

Could Help Qualify for Special Financing.

Some dealers offer special financing deals through the dealership. The deal could be a few months grace period without making a payment or lower interest rates, but often you must make more than the minimum down payment to qualify for them.

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How to Determine Your Down Payment

Again, a good down payment for a car will depend upon your circumstances. If you’re trying to offset a low credit score, it would be a good idea to put down more money.

Putting down 10% of the car’s sale price will be sufficient for a used car. If you’re buying a new car, lenders may want a larger down payment to offset its depreciation. In that case, your best down payment could be 20%.

Lessees may not have a choice about their minimum down payment for a car. Often, the lease’s terms will specify how much you must put down. Since you will never get this money back, and will not own the asset at the end of the lease’s term, it’s not advised to pay more than this amount.

Before you drive onto a dealer’s lot, take a look at your bank account to determine how much you can afford to put down on a car. Check your credit so that you’ll have an idea of the interest rates you’ll be offered. That way, you’re more prepared to negotiate with the dealer.

Then, think of the length of the loan that you’re going to ask for with financing. If you decide on a shorter loan term, such as 24 to 36 months, then a higher down payment will offset the monthly payment amounts.

Auto loan terms longer than 48 or 60 months may not need as large of a down payment because the amount is broken up over more months, thus is less. The length of your auto loan is a very important thing to consider before even thinking about heading to the dealership.

Ultimately, the best down payment for a car is one that yields an affordable payment and has a decent interest rate.

Down Payment Alternatives

A trade-in is one of the best alternatives to a down payment. If you currently drive a vehicle which still has value, you can trade it in with the dealer to reduce the amount you’ll owe on your new car. Once you decide on a mutually agreeable value for your trade-in, that amount will be deducted from your new car’s loan.

Cash rebates on purchases are another alternative to a down payment. When a dealer offers a cash rebate, it’s automatically deducted from the car’s purchase price. On new car leases, rebates go to the lender.

There’s no clear-cut answer to the question, “What is the minimum down payment on a car?” The best answer considers a variety of factors to determine the best down payment for your situation, such as your credit score, the car’s sale price and how you big of a monthly payment you want. Consider all of these when deciding how much to put down on your new car.