Are you thinking about taking the big step of buying a new car but are apprehensive as to how to go about it? Will you have enough money for a down payment and to make monthly payments? Just how much should a car down payment be? Although it might seem complicated at first, it’s quite simple when you consider how a down payment works.
In this guide, we’ll address the pros and cons and FAQs of down payment, and how much an average down payment should be.
What is a Car Down Payment?
First, consider the question: What is a down payment? A down payment is an initial, partial payment applied to a purchase that is financed by the purchaser. In some cases, a down payment might require taking out an auto loan, depending on whether you want to finance a new car or a used car, as their prices significantly vary.
The Ideal Car Payment Percentage and Associated Features
If taking out an auto loan is required for you to make a car down payment, there are a few things to consider, such as the average down payment on a used car or a down payment on a new car. Percentage rates, car value, and associated fees also need to be considered when deciding on a used car or new car down payment.
Down Payment Percentages for New and Used Cars
|New Car||Used Car|
|Percentage: 20% of the purchase price. In some cases, it’s advisable to put down a little more than 20% but not less, since that might put you in an underwater (upside down) situation, where the market value of your vehicle becomes less than the amount you owe.||Percentage: 10% of the purchase price. In some cases, it’s advisable to put down a little more than 10% but not less, since that might put you in an underwater (upside down) situation, where the market value of your vehicle becomes less than the amount you owe.|
|Car Value Depreciation: Your car depreciates by 20% the minute you drive it off the lot. The car’s value goes down, but its cost stays the same—therefore, a shorter loan term equals less chance of an upside-down situation.||Car Value Depreciation: Used cars lose an average of 60% of their initial value in the first five years of ownership. The car’s value goes down, but its cost stays the same. We suggest, then, putting down a little more than 10% for a shorter loan term and lessen the chance of finding yourself in an upside-down situation.|
|Associated Fees: Tax, Title, and License (TTL) fees||Associated Fees: Tax, Title, and License (TTL) fees|
|In case of a wrecked car, you are legally obligated to make your monthly loan payments to the bank or financial lender, until the loan is paid off. Your insurance will only cover your car’s actual worth (before it was totaled). This leaves you with out-of-pocket expenses to cover the rest of the cost—unless you have GAP insurance (Guaranteed Auto Protection), which is add-on car insurance coverage.||In case of a wrecked car, you are legally obligated to make your monthly loan payments to the bank or financial lender, until the loan is paid off. You might also consider looking online for the best no interest credit cards, as they often have car insurance as a bonus.|
Why is Paying a Larger Down Payment Better?
Again, how much should you put down on a car in order to get the best deal? Simply put, the higher the down payment, the lower the monthly payment, as well as a better interest rate. Making a larger down payment is better, overall, because:
You’ll be closer to paying the real price of the car
The depreciation of a car’s value when it leaves the lot is something to consider. And the car’s cost actually increases through interest fees, insurance, and other fees. It’s smarter to make a larger down payment and pay off your loan in a shorter amount of time.
Your insurance may cover the full amount if your car is wrecked or totaled
Alternatively, you’ll need to pay out-of-pocket or obtain Gap insurance.
You’ll have lower monthly payments
Due to a larger down payment. In comparison to a minimum down payment for a car—stretched out for the same time period—you’ll pay significantly less on a monthly basis.
A larger down payment means a shorter loan term
With a larger payment, you can choose a 48-month term rather than a 60-month one. A shorter loan term equals less time spent paying off debt.
You’ll have more opportunities for loan approval
The larger the down payment, the more likely you are to successfully obtain a car loan. This communicates to the bank that you are committed to paying the loan back. Research has shown that people who are willing to make that initial investment are less likely to mismanage their money.
You pay a lower interest rate
Due to the larger down payment and shorter loan term, you’ll pay less in interest charges over the course of the loan.
You avoid an upside-down situation
Remember, zero down payment—as opposed to a large down payment—means you’ll be underwater the moment you sign the paperwork. A $0 down payment car loan is when the bank offers to pay the entire cost (100%) of your car, not requiring you to pay anything upfront.
Downsides of Paying a Larger Down Payment
Again, is it better to make a large down payment on a car? Although there are advantages to a larger down payment, consider these disadvantages:
A strain on your savings
One challenge that many faces are the lack of enough money saved for a large down payment on a car. In such situations, it’s important to reconsider all options and calculate whether making a large down payment is the right move.
What if you urgently need a vehicle?
With today’s living standards, a car is a great asset, even a commodity. But many potential buyers don’t have the money to make a large down payment, which would potentially require months of saving.
How much should a car down payment be with regards to the interest rate of a car?
In most cases, your down payment won’t actually lower your interest rate. This is largely related to the state of your credit score, which, if poor, then you might want to consider finding ways to fix it first and then think about taking out an auto loan.
How to Afford a Larger Car Down Payment?
After asking yourself how much should a car down payment be in order for you to get the best deal, you decide that a larger car down payment is the smarter way to go. But you think that you’re not yet financially stable enough to make a large down payment. What then? Note some helpful suggestions that could ultimately help you make a larger down payment:
Reconsider big purchases, start budget planning, and set monthly goals. Consider ways to save up for a car down payment by making cutbacks in your budget. If this is difficult, consider searching online for the best personal loans available.
Trading in your old vehicle
For a new or used car can reduce your down payment.
Build or fix your credit score
By paying all bills on time, paying off debt, and keeping balances low on your credit cards. In addition, avoid closing unused credit cards. (Owing the same amount but having fewer open accounts may lower your credit score.) Consequently, you’ll have a better opportunity for taking out loans for the car down payments. You can also go online and check out the best credit repair companies available.
Lease a car
This is a good financial move that usually helps build your credit score because your payments are reported like auto loan payments.
Buying an affordable car
And even this might be your best option. You may have your mindset on your dream car, but financial accountability tells you to settle on an affordable car. In fact, the smartest investment for such a significant purchase at this point in your life would be to buy a car that is affordable. This also means that a standard down payment on a car would be a lot cheaper.
How much should you put down on a car? It really depends on your financial stability. Questions we’ve already considered may help you decide how much to put down on a car:
- Does your auto loan cover a down payment for a new car, or should you opt for a used car?
- How will the depreciation of the car’s value affect your overall loan term and will it put you in a possible upside-down situation?
- Are you able to carefully weigh the pros and cons of making a large down payment?
- Are you able to lower your expectations when it comes to buying your dream car?
A car down payment is calculated as a percentage of the car’s purchase price. For example, if you’re buying a $40,000 car and make a 10% down payment, it would be $4,000. In most cases, an auto loan is taken out from the bank in order to manage payments of a loan during a specific loan term.
The recommended down payment for a car is no less than 20% for a new car and no less than 10% for a used car. In both cases, however, it’s advisable to put down more than the minimum advised percentage, to ensure you don’t find yourself in an upside-down situation.
The amount you put down on a car can affect your overall interest fees. Generally, the larger the down payment, the lower the interest rate—you’ll then have a shorter loan term. But not all are eligible for this preference when thinking about a large down payment. Those with poor credit scores are typically charged higher rates.
It is possible to buy a car with no down payment, but in such situations, there’s a higher risk of being tagged with higher interest fees. There is always the option of buying a cheaper used vehicle or trade-in your current car. So, is a down payment required when buying a car? No.
As with any car, you have the option to decide whether you want to make a down payment. In order to make a down payment, you must first consider how much should a car down payment be. A used car can be bought without a down payment, but keep in mind that you may then need to pay a higher interest rate.