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How Does Down Payment Size Affect Your Auto Loan?

How Does Down Payment Size Affect Your Auto Loan?
Kelly Boyer Sagert
Kelly Boyer SagertUpdated November 15, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Once you’ve found the right car for your needs, whether new or used, the next step is finding good financing — unless you can pay for the car and any other costs with cash, of course.Typically, the loan process includes making a down payment. Read on to learn more about what exactly a down payment is and how its size can make an impact on your car loan.

What Is a Car Loan Down Payment?

In auto loan terminology, a down payment is cash that you put upfront toward a vehicle’s purchase price when you’re financing it. Basically, it’s similar in function to the down payment you might make on a home, with the goal being to lower the amount you have to finance. Although some lenders will finance a vehicle without a down payment (more about that later), there are benefits to putting one down for the potential borrower, too.

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

You may consider several factors when determining how much of a down payment to make on a car. Those can include the following:
  • How much you can comfortably put down
  • Whether you’re buying a new car or a used one
  • What programs the lender is offering
  • What your credit score is

Rule of Thumb for Down Payments on a Car

Given that situations vary, a basic rule of thumb for down payment on a car is to put down at least 20% on a new car purchase and 10% on a used one. As you’re finetuning your decision, it may help to consider the potential benefits of making a down payment. You don’t necessarily need to make a down payment to qualify for car loan financing, but a minimum down payment for car buying gives you some equity in the vehicle to build upon.Recommended: Electric Car Costs: Everything to Know

4 Benefits of a Larger Down Payment

How does increasing the size of your down payment impact your auto loan? Although not all lenders require a down payment, putting one down can result in several benefits for you, including the following:

1. Streamlines Loan Approvals

When deciding which loans to approve, lenders consider how much risk they’re taking with each particular approval. When a borrower doesn’t make a down payment, the lender is taking on more risk overall and will have more to lose if the borrower defaults on the loan. Even if the lender repossesses the vehicle and resells it to recoup the loss, it may not make up the full cost of the debt because, as soon as a car is driven off the dealer’s lot, it begins to lose value. With that context in mind, it makes sense that a down payment can help to reduce a lender’s risk. That, in turn, likely makes the lender more inclined to approve the loan. Plus, a dealer may offer special programs with a bigger down payment (but be sure that you’re clear about all of the details).

2. Lowers Monthly Payments

Next question: How does the down payment affect the loan amount? How does that benefit the borrower? Obviously, if you pay money upfront, your loan amount goes down. But it’s good to understand how much that can impact your monthly payments. Here’s how it works. Let’s say that you bought a $35,000 car and the lender is offering a 4% APR for five years (60 months). If you don’t make a down payment and don’t trade in a car, the monthly payment will be $645. But if you put down $5,000 (in any combination of cash and trade-in), the payment goes down to $552, which would save you $93 monthly. If you put down $10,000? The monthly payment is then $460, which would save you $185 per month. Down payments can minimize the loan amount you borrow if you’re interested in lowering car payments upfront.

3. Reduces Interest Paid Back

Besides reducing the monthly payment, having a bigger down payment/lower loan amount means that you’ll pay back less interest over the life of the loan. To illustrate, here are dollar amounts for the three examples shared above:
  • No down payment: $35,000 loan amount / 4% / 60 months: $3,675 in interest
  • $5,000 down payment (14.29%): $30,000 loan amount / 4% / 60 months: $3,150 in interest
  • $10,000 down payment (28.57%): $25,000 loan amount / 4% / 60 months: $2,625 in interest
You may also wonder, “Does down payment affect interest rate terms?” The answer is “yes,” it can, depending on what loan programs a particular lender offers. For many lenders, a lower loan-to-value ratio (the amount of the loan compared to the car’s value) can lower the interest rate they’ll offer.

4. Gets Ahead of Depreciation

Vehicles can lose 20% or more of their value annually so if you don’t make a significant enough down payment, you could end up owing more on your vehicle than its value as soon as you leave the dealership. When that happens, it can be challenging to trade or sell your car later on. Making a sizable down payment may prevent you from getting an upside down car loan in which your auto loan debt is greater than the value of your car.

Are There Any Downsides to Making a Large Down Payment?

Yes, there are some potential downsides to making a large down payment on a car. How down payments affect car loans is they reduce the amount of money you need to borrow, but large down payments can diminish your discretionary income. One of the downsides to making a larger down payment is it may deplete your savings. Having a sufficient amount of savings can serve as a cushion in the event of an emergency. Making a large down payment on a car may also limit your financing or refinancing options. Some lenders may not offer financing if you propose to make a down payment that the lender deems too large. You might not meet a lender’s financing requirements if you’re seeking to put 90% down on a vehicle that costs $25,000. Some lenders have minimum financing standards that prevent them from offering auto loans less than $7,500.

What If You’re Unable to Make a Down Payment?

Perhaps you’ve been convinced by the benefits of making a down payment but you just don’t have the money. Is there anything you can do instead to try to avoid problems like owing more on your loan than your car is worth? There are a few strategies. Possibilities include the following:
  • Buying GAP insurance: If your vehicle gets totaled, guaranteed asset protection or a GAP waiver can help you fill in the gap between what you’re given by your insurance company and what you still owe the lender.
  • Buying new car replacement coverage: In this case, if the vehicle gets totaled, you’d get a replacement vehicle. In some cases, this may already be part of your car insurance policy.
  • Choosing a less expensive vehicle: With a lower payment, you might be able to free up cash for a down payment.

How to Save for a Down Payment

If you can defer your purchase, you may also want to consider taking some time to save up for a down payment. Strategies you might consider include the following: 
  • Come up with a goal. Figure out how much money you’d like to put down on a car purchase. Then assess how much you think you can put toward it each month.
  • Start a budget. If you don’t have one already, this can be a useful tool to help you track and control the money going in and out.
  • Start a special down payment account. This can make it easier to keep the funds separate from your other money and see them growing.
  • Reduce spending. Get rid of unused memberships or redundant subscriptions, for example. And try to avoid large purchases, at least until after you have your down payment in hand.
Recommended: Should I Borrow Money for a Down Payment?

Used Car Vs. New Car Down Payments

In general, new cars are more expensive than used ones (although a basic new automobile can be less expensive than a high-maintenance luxury vehicle that’s used). That said, typically, it’s best to put down at least 20% on a new car purchase and 10% on a used one. That may be in the form of cash, a vehicle you trade in, or a combination. When making a decision between a new or a used vehicle, note that loans on used ones typically come with higher interest rates because their value may be harder for the dealer to estimate. Here’s a table to summarize the similarities and differences between down payments for used cars and new cars:
New CarUsed Car
Typical down paymentAt least 20%At least 10%
What you can useCash, trade-in, or a combinationCash, trade-in, or a combination

Other Ways to Reduce Auto Loan Payments

If you’re looking for other ways to reduce auto loan payments, auto refinancing may help. An auto refi loan may provide you with a lower monthly payment. Refinancing may be right for you if you can lock in a lower interest rate. Another way you may reduce your auto loan payment is by asking your lender for relief. If you need a lower monthly payment, lenders may agree to a loan modification that can extend your repayment term. A longer term can reduce your monthly payment, but you may pay more interest over the life of the loan. A car loan length on average is about 70 months for a new car and 68 months for a used car. Recommended: When Should or Shouldn’t You Refinance a Car Loan?

Compare Auto Loan Refinancing Rates

If you already have a loan and are looking for auto loan refinancing, Lantern by SoFi may be able to help. Just fill out one short application and explore your refi options. Compare auto loan refinance rates without impacting your credit score.*

Frequently Asked Questions

Does a down payment directly affect the loan amount?
What is a down payment?
How big should your car loan down payment be?
What are the benefits of a bigger down payment?
What if you can’t pay a down payment?
Photo credit: iStock/solidcolours

About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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