How Much Should I Put Down on a Car?
  • Buying Guides

How Much Should I Put Down on a Car?

By Autolist Editorial | February 26, 2020

If you are in the market to finance a new or used car, then you may be asking yourself how much money to put down. A decent down payment can lower your overall purchase price, interest rate and the monthly payment on your next car.

How much down payment you need depends on several factors. Here is more information about financing your car and determining how much down payment you should have for that next car purchase.

Reasons Why You Need a Down Payment

You may have seen those commercials that advertise auto loans with no money down, but those offers often have strings attached, and they're not for everyone. Here are some reasons why it is financially prudent to put money down when you finance your car with a car loan.

You Guard Against Depreciation

By putting even a small amount towards your purchase, you will reduce the chance that you will be upside down in your loan. New cars depreciate a great deal in the first year after the sale. If you happen to wreck your new car, or you need to sell it quickly soon after you bought it, then a down payment will reduce the amount you owe on your loan or have to pay back to the loan company.

You Look Better to the Finance Company

When you pay any money upfront for your car, you show the lender that you are less financially risky. If you have a low credit score or no credit history, a more substantial down payment can increase the lender's faith in you. The lender will feel that they are more likely to get their money back if something happens to the car. Putting money down makes you appear serious about your financial responsibility and commitment to the loan.

You Will Have a Lower Payment

Any amount that you put down towards the price of the car will lower your payment compared to if you put no money down. If you plan to finance your car over a long period, then a lower payment will come in handy if your money situation gets tight. You will be more likely to be able to make payments until your situation improves.

If your monthly payments are low enough, then some lenders may let you pay ahead or double up on them when you are doing well financially. It not only shortens your overall finance term but also decreases the total interest you pay in some cases. You may also be able to lower your car insurance costs by paying off the loan early.

You May Get a Lower Interest Rate

Depending on your credit rating, you may get a very favorable interest rate if you put money down. Many finance companies consider the amount you put down when calculating their rates. If you finance through the dealer, a larger down payment may qualify you for special deals and promotional programs such as a rebate or lower price.

Tips For Building Up a Car Down Payment

While many car finance companies suggest that you put at least 20% down on your car, that amount is not ideal for everyone. Here are some tips for saving money on your car loans and building up a down payment.

Determine Your Budget

To help you determine how much you should put down for your car, first, decide how much car and how much loan you can afford. These two things go hand in hand. The more down payment you can afford to put down, the less you will need to be financed. You may wish to buy a used vehicle, or a less expensive new vehicle model, so that you can put a higher amount down.

Shop Around for Car Loans

When calculating how much you need to put down for your car, take a look at what different lenders require and offer. Some ask for a minimum payment size and a specific loan term. In some cases, you can be subject to a penalty if you pay off your loan early. You may find a big difference in interest rates and terms between banks, credit unions, and dealerships.

Set Up a Special Savings Account

One way you can build up your down payment is to make a separate savings account for your down payment. Put away the amount of money each month that you think your car payment should be. Not only will this help you determine how big a payment you can make, but it will also help you become accustomed to making that payment.

Consider a Lower Price Vehicle

If you are set on a particular make and model, but you think that you can't afford a decent down payment, then consider buying an older, used car. Also, unless you are incredibly loyal to a particular brand, check out similar vehicles in different makes and models. If you don't mind switching brands, then you may get more for your money with a different make. Plus, you may be able to make a larger down payment.

Use Your Trade-In

Another way to add to your down payment is by trading in your old car. However, just like searching for a suitable loan, do your research to see how much you can get for your vehicle. Most dealerships give you the minimum Blue Book value for a car in average condition. You may be able to get more by selling the vehicle yourself and using the cash as part of the down payment.

A Large Down Payment Isn't Always Ideal

In general, a larger down payment is better. However, this is not always the case. Many finance companies have a minimum amount that they will loan. That amount varies between lenders, but often the minimum amount usually ranges from $5,000 to $10,000. So if you are planning to buy a $15,000 car and want to put down $12,000, then your lender may require you to put down less money.

The reason why banks don't like to loan less than a certain amount is that they may feel that the loan is more trouble than what they will get back in interest. In other words, they don't think they can make a profit from a minimal loan. In cases like this, you can find another car for less money and pay for the whole thing in cash, or you can put the extra money back into your savings and finance the minimum amount.

Down Payments on Leased Cars

The difference between purchasing a car and leasing is that you typically turn in the vehicle at the end of the term. However, even though you aren't technically buying the car, you can still make a down payment on a lease. When you put a down payment on a lease contract, you are lowering your monthly payment, but that doesn't save you interest like you would with a car loan. One of the significant downsides of this is that you lose any money you put upfront if your car gets stolen or totaled.

The bottom line is that if you are purchasing either a used or new car, a down payment is beneficial, even if it is small. Strive to accumulate as big a down payment as you can reasonably afford and get the smallest loan possible when purchasing. However, down payments on leases are not always the best idea. Therefore, whether you buy or lease, look into your long-term costs to determine which ways you can save the most.