If you’re considering buying a car in the future, you may be wondering how much of a down payment you should put down. And should your down payment change based on whether you’re buying a brand new car or used car?
Ultimately, deciding how big of a down payment to make is usually up to you, your specific situation and whatever car loan you qualify for.
A good start is to begin by using an auto loan calculator and unpacking one by one, what you should consider when deciding on an amount for a down payment on your next car.
If you want to make your down payment go further by shopping smart for your next car, shopping smarter will help your down payment purchasing power.
What’s Ahead:
Why you should put a large down payment on your next car
Putting a large down payment on your next car is usually a smart move for quite a few reasons.
You can avoid going upside down on your loan
If you’re buying a new car, a large down payment helps you have more equity in the car and avoid going upside down on the loan when the initial depreciation reduces your car’s value.
You won’t be paying your loan as long
A larger down payment will also result in a lower balance owed. Since interest payments and monthly payments are initially calculated based on how much you borrow, a smaller loan means less money will go toward making interest payments and monthly payments.
Reducing the interest expense and your monthly payment allows you to keep more of your monthly income for other expenses.
You won’t need full coverage insurance if you don’t want it
When you finance a car, most lenders will require you to keep full coverage insurance whether you want it or not. Keeping collision and comprehensive car insurance on a car is usually a smart move if you can’t afford to fix or replace the car after an accident.
However, if you’re financially secure and can replace a car without any major negative financial impact, it may not make sense for you to carry these coverages. Some lenders may require you to pay for gap insurance, as well, especially if there is a risk you’ll be upside down on your car loan.
You may get a better loan rate
Some auto lenders consider the amount of your down payment as a factor when determining your auto loan’s terms.
In general, a lender will generally view you as a lower risk the higher your down payment is assuming all other conditions remain equal.
The reality: put a reasonable down payment on your next car
So exactly how much should you put down on your next car? The rule of thumb commonly cited is to put down at least 20% of the purchase price on your next car. If you want to and can afford to put down more, it will help to lower your interest payments and monthly payments.
Unfortunately, most people aren’t able to accomplish this goal. In fact, the average car down payment in 2017 was just 12% according to an Edmunds analysis of new and used car purchases.
The ideal: buy cars with cash
In an ideal world, people wouldn’t need car loans. If you’re able to make your current car last for a while longer, it often makes sense to keep it. By keeping your car longer, you can pay off your current car loan. Once the current car loan is paid off, you can start saving what used to be your monthly car loan payment into a savings account dedicated to your next car purchase.
Even if you have to put a small amount of money into additional maintenance costs, it may be worth it. As long as you aren’t shoveling more money into repairs than the car is worth or your old monthly car payment, you may still come out ahead.
You’ll have to run the numbers to see if repairing your old vehicle or purchasing a different vehicle is the smarter move, but you should definitely check before you automatically go out and buy a new car because your old car needs a small repair.
If you can keep your old car long enough, you may be able to pay for your next car in cash. Paying for cars in cash gives you many more financial options and makes the whole process easier.
Should you ever put zero down on a car?
In rare cases, it can make sense to put zero down on a car. If you have the entire amount to pay for the car in cash but instead get a 0% interest rate auto loan, you could put your money in a savings account that earns interest on your money. Then, you’ll get to bank the interest while paying 0% on the auto loan which allows you to come out ahead.
This only works if you can guarantee you won’t spend the money you’ve saved for the car on anything else, which takes more discipline than most people have. For that reason, it is almost always a better idea to simply put down as large of a down payment as your finances can handle without endangering your emergency fund and other financial goals.
Finding an affordable car
Finding an affordable car can be as easy as using a car buying service for new cars, such as Edmunds, or looking for a deal for used cars at both dealerships and at online classified websites, which Edmunds also offers.
The new car buying process should mostly be focused on finding the right car for you that fits within your budget and making sure you’re getting a price you’re comfortable with. New cars are commodities and a particular make and model is exactly the same from dealership to dealership, so shopping for the best price makes sense.
If you’re buying a used car, things are more complicated. Each used car is unique. You’ll have to verify the condition, mileage, age and how each car drives to see if it is a good deal.
You can also use car valuation tools, including those offered by Edmunds to see if the price the used car is offered at is reasonable.
When buying a used car, it usually makes sense to pay a mechanic to check the condition of the car. You should check the vehicle’s history report, as well, to make sure there aren’t any red flags hiding out of plain sight.
Summary
When you’re shopping for a car – new or used – and calculating how much your car payments are going to come out to be each month, you’ll want to really be sure you’re getting the best price you possibly can. Car buying services like Edmunds can help if you’re not good at negotiating.
As you’re considering how much of a down payment you can and want to make, the rule of thumb is to put down 20% of the purchase price of the car. Regardless of which car you decide to buy, putting down a large down payment is usually the best move for your finances.
Read more
About the author
Article comments
If the stock market historically returns 7% and you can get a car loan for under 3% why would you want to put a large down payment?
It matters that you have the financial flexibility to actually make a return on the stock market. Getting oneself into a cash crisis when your money is tied up in stocks can lead to fees and higher taxes paid on marginal gains. These both can reduce your real return. On top of this, you pay monthly loan interest on the loan principal, not the remaining amount due at the end of each month. So, unless you can guarantee that you will have the same amount of money as the principal of the loan in the stock market during the entire loan term, your return may not cover the cost of interest.
Additionally, it’s important to be careful about using historical returns as a proxy for future returns. Historical returns are averages. So, that doesn’t guarantee you’ll make that return over your loan term. Financial professional often due a similar opportunity cost analysis as you have done (7% vs 3%), but they use predictive models to determine probable returns they can make in many different scenarios using a probability distribution… The point being, the stock market is uncertain meaning you don’t know if you’ll actually earn 7% during the time you have a loan, and if you don’t have the tools to probably predict future stock performance, its not reasonable to assume it will be the same as the past.
Hope this help!