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How Much of a Down Payment Should You Put on a Car?

How Much of a Down Payment Should You Put on a Car?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated August 24, 2022
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Financing a car loan is a major financial decision, and it involves a lot of tradeoffs. One of the most significant ones is how big a down payment to make.The size of your car loan down payment may impact several things, including how much your monthly payments will be and how much interest you’ll have to pay on the loan. Let’s look at what you’ll need to know to figure out a good down payment amount for you.

What Is a Good Down Payment on a Car?

So, what is a good amount to put down when you’re taking out a car loan? The typical down payment on a car is often quoted as 20%, but the truth is that not everyone pays that much.In the first quarter of 2022, the average down payment on new vehicles stood at $6,026, while the average down payment on used vehicles stood at $3,574, according to Edmunds data.Banks and other lenders financed an average of $39,540 on new vehicles and $27,945 on used vehicles bought in Q1 2022, Experian data show. The average transaction price for new vehicles surpassed $48,000 in June 2022, according to Kelley Blue Book.These numbers suggest the average U.S. car buyer puts more than 10% down when buying new or used vehicles.

Down Payment on a New Car

A 20% down payment on a new car could be ideal for establishing an equity stake from the get-go. This may prevent your car loan from becoming an upside down auto loan in which your loan balance is greater than your car’s appraised value.The way how car loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include interest charges as determined by an annual percentage rate or APR.Lenders may impose late fees if you fail to make a timely payment on your loan. But lenders may also honor a car payment grace period before such penalties would apply.

Down Payment on a Used Car

A 10% down payment on a used car may be sufficient in preventing your loan from starting off underwater. Borrowers are expected to provide proof of identity and proof of income when applying for auto loan financing, among other auto loan requirements.Let’s say you buy a used car that costs $30,000 and have no trade-in. If you made a down payment on a car of 11%, that would be $3,300. You’d still have to take out a loan for $26,700. Over five years, your monthly loan payment might be around $500. Consider whether you can afford that amount over the relatively long term of your loan.This calculation doesn’t factor in car loan interest, which can vary depending on several factors, including your credit history, the length of the loan, and how much you plan to borrow.The right amount to put down depends largely on your finances and priorities. When you’re determining how much to put down on a car, look at the big picture, since this is a debt you may have for several years. Determining how much down payment for a car to make is truly a personal choice.

Calculating Your Down Payment

Calculating your down payment amount can be done by multiplying the percentage of your desired down payment by the car’s total sale price. The formula could be expressed as follows:(percentage down) x (total sale price) = down payment amountFor example, you may calculate a 10% down payment by using the decimal form of 10% and multiplying that number by the total sale price of the vehicle. If the vehicle costs $25,000 to buy, you may use this formula to calculate a 10% down payment:0.1 x $25,000 = $2,500 down payment amountYou may calculate a 20% down payment on a vehicle by multiplying 0.2 by the vehicle’s total sale price. If the vehicle costs $25,000 to buy, you may use this formula to calculate a 20% down payment:0.2 x $25,000 = $5,000 down payment amount

6 Benefits of Making a Down Payment on a Car

Some lenders don’t require a down payment on a car at all. Not paying a down payment can be tempting, especially if you don’t have a chunk of cash to spare. But, again, consider how that will impact the length of your car loan (or your term, as it’s called in car loan terminology) and your monthly payments.Making a down payment brings several benefits you may want to consider as you make your decision. Below we highlight six benefits of making a down payment on a car:

1. Your Monthly Payments Will Likely Be Lower

To state the obvious, the more you pay up front, the less you’ll still owe. That means that potentially, your monthly payments will be lower than they would be if you make a smaller down payment. That can help your monthly budget going forward.A classic strategy for lowering car payments is making a sizable down payment when financing a vehicle purchase. Deciding what is a good down payment on a car may depend on what works best for you. Putting 10% down or 20% down can be ideal if you can afford the up-front payment.

2. You’ll Pay the Car Off Faster

When you pay little to none up front, you’ve got more work to do to pay off that car loan. Down the road, your loan might even become an upside down auto loan, meaning you owe more than the car is actually worth.Making a decent down payment on a car may make it easier to take a shorter repayment period (since your monthly payment will be lower). That means you might be able to pay your car off in two or three years, for example, rather than five or six.

3. You May Get a Lower Interest Rate

When you opt for a shorter repayment period, lenders may offer you a good interest rate on a car loan, which means you’ll pay less over the life of the loan.Also, a larger down payment can indicate to lenders that you’re less of a risk because you’ve made the effort to put more down. That may sway them to lower your interest rate.

4. You May Lower Your Loan-to-Value Ratio

Making a down payment on a car can reduce the loan-to-value ratio of your loan. This ratio, also known as LTV, measures the size of your loan against the value of your vehicle. A higher LTV represents a higher risk to lenders. A lender may offer you better terms and conditions on an auto loan if you reduce the LTV by making a sizable down payment.

5. Avoiding Being Upside Down

As mentioned earlier, a down payment may prevent your car loan from becoming an upside down auto loan. It’s generally not ideal for borrowers to carry a loan underwater. A sufficient down payment may help you avoid carrying a loan balance greater than your car’s appraised value.

6. Improving Loan Approval Chances

Making a down payment on a car may improve your chances of getting approved for financing. Some lenders may deny a car loan application if the applicant seeks 100% financing. Consumers with bad credit may have a harder time securing subprime auto loans without making a down payment on the car.Recommended: Should I Borrow Money for a Down Payment?

Disadvantages of Making a Down Payment

There are certain disadvantages of a large down payment when car loan shopping. We highlight some of those disadvantages below:

You May Be Cash-Poor

If you don’t have thousands sitting in your bank account to put down on a car, it might be a struggle to put any money down. You may need a car, but you might not be able to easily afford it if it involves a down payment. You may have to wait longer than you’d like while you set aside money so that you can afford the down payment.Consumers may ask, “What happens to car loans when someone dies?” The answer is that car loans do not simply disappear when a borrower dies. A surviving spouse may be responsible for paying the debt, or a lender may move to repossess the vehicle.

You May Not Get a Lower Rate

If you have bad credit, you might not get a lower interest rate when you make a down payment. While bad credit auto loan refinancing and subprime auto loans do exist, they don’t typically offer the best rates, so you may pay more in the long run than if you had good credit.

5 Tips to Save for a Down Payment on a Car

If the idea of coming up with thousands of dollars for a down payment on a car seems daunting, here are five tips to help:

1. Start Saving Early

If possible, start setting aside even just $100 a month as long as you can before you want to buy a car. That way, you’ll have a nice little nest egg saved when you’re ready to buy. Saving just $100 a month would get you $1,200 in a year.

2. Cut Your Spending

If buying a car is a priority, you may have to cut back in other areas of your spending. How much do you spend dining in restaurants? Do you really need all your cable channels? Could you lower your cell phone bill by switching providers?Spending a few minutes to determine where you can cut back could help you find more cash to set aside for your down payment.

3. Know How Much You Need

It’s easier to save if you have an end number in mind. Shop for cars and decide whether you want to buy a new or used car. (Opting for a used car, which is likely to cost less, can also help you save dough.) Then research how much the model you want would cost.From there, decide how much you want to make as a down payment. If you can pay 20% of the price and be in good shape with your monthly loan payment, you’ve got a number you can set as your target for saving.

4. Sell Your Stuff

Most of us have things sitting in our garage or storage space that we no longer use, like exercise equipment or tools. Selling things you don’t need in a garage sale or online could also help you raise some cash.

5. Create a Budget

Creating a budget that cuts unnecessary spending and promotes a frugal lifestyle can help you save for a down payment on a car. A personal budget plan can account for your expected income and your necessary expenses. You can follow the budgetary guidelines to help keep yourself on track toward meeting your goals.Recommended: Saving Money on a Car

Alternatives to Making a Large Down Payment

If you can’t afford to make a large down payment, you do have a few other options that can keep your monthly payments lower:

1. Trade in Your Old Car

If you have a car you can trade in when you buy another one, it can lower what you pay. It may also mean that you don’t have to make a cash down payment. You can research the trade-in value for your car on sites like KBB.

2. Take the Shortest Payment Term You Can Afford

The shorter your repayment period, the lower the interest rate you might qualify for. The average car loan length is about 70 months for a new vehicle and 68 months for a used vehicle, but if you can afford the monthly payments for a shorter period, like 36 months, you’ll get a lower interest rate. Plus you’ll pay less interest over the life of the loan than you would if you stretched out your term.

3. Pay Your Car Off Early

Paying off your car loan early can save you several hundred dollars in interest. Even if it’s a strain to pay extra on your loan each month, you’ll be rewarded with a future of no payments at all! Just be sure to check your contract to make sure there are no prepayment penalties.

Is 0% Down Ever a Good Idea?

Depending on your circumstances, putting 0% down may be a good idea for you when shopping for a car. Making a down payment might not be right for you if it depletes your savings and diminishes your quality of life.Having a car can be a useful asset to own, even if you purchase the vehicle with 0% down. If you qualify for 100% financing and 0% APR, you may have little incentive to put any money down. As mentioned earlier, determining how much down payment to make for a car is truly a personal choice.Buying a car is essentially making an investment. A down payment isn’t necessary if you qualify for 100% financing. Some consumers may even prefer to invest their income on something other than a down payment on a car that may depreciate in value.

The Takeaway

Making a down payment when you buy a vehicle can make buying a new or used car more affordable and may help you get a lower interest rate.If you’re not ready to buy right now, but are considering auto loan refinancing, Lantern by SoFi may be able to help. Compare multiple offers from our network of lenders in minutes.

Frequently Asked Questions

Is it possible to put no money down on a car?
Are there any reasons not to make a down payment on a car?
Is it possible to put too much of a down payment on a car?
Photo credit: iStock/deepblue4you

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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