When buying a new or used car, one of the biggest decisions you’ll make is how much money to put down as a down payment. The down payment is the amount you pay upfront towards the total cost of the vehicle, reducing the amount you’ll need to finance. Determining the right down payment amount involves weighing several factors, including your budget, the total cost of the car, whether you’re trading in a vehicle, and the financing terms available.
How Much Should You Put Down on a Car?
There is no single rule for how much you should put down on a car purchase. However, here are some general guidelines on down payment amounts:
- 10-20% of the purchase price – Putting down at least 10% of the total vehicle cost is a good starting point. A 20% down payment or higher is ideal if you can afford it.
- $1,000-2,000 minimum – Even if it’s below 10%, a minimum of $1,000-2,000 is recommended to lower your monthly payments.
- Enough to cover taxes/fees – You’ll also want to put down enough to cover sales tax and DMV registration fees which can add several hundred to over $1,000 to the vehicle’s cost.
- Max out rebates/incentives – If the vehicle comes with rebates or incentive offers, you may need to put down a certain amount to maximize savings.
With used cars, it’s also advisable to put down at least 20% if you have the funds available. This will help you avoid being underwater on the loan (owing more than the car is worth) should its value depreciate faster than expected.
Factors That Determine Down Payment Amount
When deciding how much to put down on a car, take these key factors into account:
Your Budget
Consider your overall budget and how much you can reasonably afford to pay out of pocket. Putting down more upfront means lower monthly car payments, but don’t overextend yourself financially.
Car’s Purchase Price
The total cost of the vehicle impacts down payment amounts. With more expensive cars, you may need to put down more to keep monthly payments manageable.
Trade-In Value
If you have a vehicle to trade in, this can lower the sales price and your down payment amount. Any positive equity you have in the trade-in essentially acts as a down payment.
Interest Rates
Higher down payments can help you qualify for lower auto loan interest rates, saving significantly on financing charges over the loan term.
Loan Term Length
The longer your loan length, the lower your monthly payments will be. Extending your loan term means you may be able to put down less money.
Credit Score
Borrowers with higher credit scores qualify for lower rates and better loan terms. A larger down payment can help offset a lower credit score.
Loan-to-Value Ratio
Your loan-to-value ratio compares your loan amount to the car’s value. A higher down payment improves this ratio, making financing approval more likely.
Benefits of a Larger Down Payment
Putting down more money upfront on a vehicle purchase has several advantages:
- Lower monthly payments – A larger down payment reduces the amount you need to finance, lowering your monthly loan payment amount.
- Lower interest costs – Less money borrowed means you pay less in interest charges over the loan repayment term.
- Shorter loan term – The higher your down payment, the shorter your loan length can be while keeping payments affordable.
- Build equity – With less owed on the loan, you build more equity in the vehicle right away.
- Improved loan terms – Larger down payments may qualify you for lower auto loan interest rates from lenders.
Potential Downsides of Large Down Payments
While putting down more money has benefits, there are also some potential drawbacks:
- Reduced cash reserves – Large down payments drain your savings. This leaves you with less available cash for other needs.
- Harder to recover costs – In the event of a total loss accident or theft, insurance coverage replaces the vehicle but not your down payment.
- Alternative uses for funds – Money put toward a down payment could otherwise be invested or used to pay off higher interest debts.
Minimum Down Payment Rules
Some lenders have minimum down payment requirements that must be met:
- Conventional auto loans – Most banks and credit unions require at least 10% down for new cars and 20% down for used vehicles.
- Subprime loans – Borrowers with poor credit often must put down at least 15-20% for either new or used cars.
- Leasing – Lease down payments are typically lower, with many leases needing $0-3,000 down.
Factors like your credit score, income, and the car’s value may impact your minimum required down payment amount when financing.
Down Payment Source Options
Where can you get the money to make a substantial down payment? Some options include:
- Savings accounts
- Checking accounts
- Proceeds from selling assets (stocks, bonds, property)
- Birthday, graduation, or other monetary gift funds
- Inheritances
- Employer bonuses or commissions
- Tax refunds
- Cash advances on credit cards (not recommended)
The best sources are existing cash or liquid assets. Avoid tapping retirement accounts or taking 401(k) loans which incur penalties and interest.
Is it Bad to Put Down Less?
Putting down less than 20% is not necessarily “bad” but does have some drawbacks:
- Higher monthly payments
- More interest paid over loan term
- Longer loan length to keep payments affordable
- Higher risk of becoming underwater on loan
- May need private mortgage insurance (PMI) which adds to costs
A smaller down payment may be your only option based on your budget and savings. Just be aware of the added costs and factor them into your car purchase decision.
Should You Make a Down Payment at All?
Here are some pros and cons of making no down payment on a vehicle purchase:
| Pros | Cons |
|---|---|
| Conserve cash reserves | Higher monthly payments |
| Invest funds elsewhere | Pay more interest over loan term |
| May still qualify for 0% APR deals | Longer loan length |
| Can get into car without large upfront cost | Harder to build equity |
If you have the savings available, making some down payment is generally recommended. But a $0 down car loan may be an option for some buyers willing to take on higher payments and interest costs.
How to Minimize Needed Down Payment
If your budget is tight, here are some tips to reduce the down payment amount you may need:
- Shop affordable vehicles – Opt for less expensive, used cars that require smaller down payments.
- Extend loan term – Stretching your loan length (e.g. 72-84 months) lowers monthly payments.
- Buy at year-end – Year-end inventory closeouts can offer significant discounts.
- Take advantage of rebates/incentives – Factor in manufacturer rebates and dealer cash incentives.
- Negotiate a lower price – Use negotiating tactics to lower the sale price.
- Buy a vehicle with high resale value – This provides equity if you sell it in a few years.
Carefully crunching the numbers when shopping for a car you can afford will help minimize the down payment needed.
Down Payment Calculator
To estimate your ideal down payment amount, you can use an auto down payment calculator:
| Purchase Price | $25,000 |
|---|---|
| Trade-In Value | $5,000 |
| Loan Term | 60 months |
| Interest Rate | 5% |
| Down Payment Percent | 15% |
| Calculated Down Payment | $2,750 |
Based on a $25,000 car, 15% down comes out to $2,750. You can tweak the variables to determine the optimal down payment for your situation.
Getting Pre-Approved Financing
Before car shopping, it’s highly recommended to get pre-approved for auto financing. This allows you to:
- Know your estimated down payment amount
- Learn the loan terms and rates you qualify for
- Determine the monthly payment you can afford
- Negotiate the purchase price from a stronger position
Having a pre-approval letter in hand shows sellers you are a serious buyer and can complete the purchase.
Is it Better to Pay Cash?
If you can afford to pay for a car completely in cash, is that a smarter move? Here is a comparison of the pros and cons:
| Paying Cash | Financing |
|---|---|
| No monthly car payment | Smaller initial payment needed |
| Don’t pay any interest | Conserve cash reserves |
| Own car free and clear | Establish/build credit history |
| Less paperwork | Take advantage of low interest rate deals |
| Simplify budgeting | Potentially invest cash instead of spending |
Paying all cash eliminates debt completely. But financing does offer more flexibility. You’ll need to weigh the pros and cons based on your specific situation.
Tips for the Down Payment Process
Here are some useful tips as you make a down payment on a car purchase:
- Inform dealer of down payment amount before negotiating final price
- When test driving, focus on cars fitting your budget/down payment
- Use a down payment calculator tool to determine right amount
- Read all financing terms carefully before signing
- Bring down payment in readily available check or cashier’s check
- Keep loan-to-value ratio low to get better rates
- Understand all fees that may alter needed down payment total
- Be prepared to also pay registration/taxes/other fees upfront
Having your down payment, paperwork, and financing pre-approval ready will make the process smoother.
Frequently Asked Questions
How much should I put down on a $30,000 car?
For a $30,000 vehicle, a good down payment amount is between $3,000-$6,000, or 10-20% of the total cost. This helps keep your monthly payments under $500 while lowering interest charges.
Can I buy a car with no money down?
While possible, purchasing a vehicle with $0 down is not recommended. You’ll end up with higher monthly payments, more interest fees, and no equity. Some lenders may require a minimum down payment amount.
Is it bad to put down less than 20% on a used car?
You can certainly put down less than 20% on a used car, but this results in higher loan amounts and payments. Ideally you want to avoid being underwater on the loan, so strive for at least 20% down if possible.
Does more down payment mean lower monthly payments?
Yes, a larger down payment directly translates to lower monthly payments. The more you put down upfront, the less you have to borrow. With a smaller loan balance, your ongoing payments are reduced.
Should I pay down payment in cash or check?
For documentation and security purposes, it’s best to pay your down payment with an official cashier’s check, bank check, or money order instead of cash. Inform the dealer beforehand on your down payment method.
Conclusion
Determining the right down payment amount requires balancing many factors – your budget, the car’s value, financing terms, loan amount, and monthly payments. While putting down 20% or more is ideal, smaller down payments are still reasonable for many buyers. Crunch the numbers carefully and use a down payment calculator tool to find the optimal amount before visiting dealerships.
