How Much Money Should You Put Down On A Car Purchase?

If you're considering buying a new or used car, a significant part of your decision will be the amount of your down payment. It's wise to think through how much you put down will affect your loan terms, interest rates, monthly payments, and more.

HOW MUCH MONEY SHOULD YOU PUT DOWN ON A CAR PURCHASE?

When buying a new car, it's generally a good idea to have a down payment of at least 20% of the purchase price. For used cars, try to put down at least 10%. If you can't afford these recommended amounts, don't worry. Put down as much as possible without wiping out your savings or emergency funds.

Reaching these recommended amounts can be a struggle, especially considering how car prices have skyrocketed recently. In 2021, the average price of a new car was over $48,000, according to Kelly Blue Book. That means a 20% down payment would be around $9,600. The average price of a used car exceeded $26,000, so a 10% down payment would be about $2,600. These figures can include cash, the value of a trade-in, or a combination of both. You can use an auto loan calculator to help you determine the terms of a new loan.

On the other hand, some people can get away with putting little or nothing down on a car because their credit scores, previous auto loan history, and debt-to-income ratio suggest they're a low risk for the lender.

The bottom line: the more you can put down when buying a car, the better off you'll be financially when you drive away.

WHY DOES THE DOWN PAYMENT AMOUNT MATTER?

It’s possible to put a small amount or no money down on your new ride. Before you decide, consider these four advantages to making some sort of down payment when buying a new or used car.

Less Interest—The bigger the down payment, the less money you'll have to borrow from a lender. That means you'll pay less in interest charges over the term of your loan. A larger down payment can help you qualify for a lower interest rate.

Lower Payments—When you pay more up front, you can reduce your monthly payments. According to Edmunds, for every $1,000 you put down, you can expect your monthly payment to drop by approximately $15 to $18. That can save you some serious cash over time.

Improved Approval Odds—Some lenders will only give the green light with a down payment, or with one that is more than 12%. If you don't put any money down, you might be limited to dealerships with higher interest rates. Having a down payment can open up more options for you.

Minimized Risk of Negative Equity—Without a down payment, you can quickly go underwater because a new car's value can drop by as much as 30% in the first year. If you make a larger down payment, you can avoid negative equity and significant financial loss if your car gets totaled or stolen.