When you're buying a new car, whether you're getting your auto financing through an independent lender or through a dealer, you'll need to decide how much money you want to put down for your car down payment. The generally advisable percentage to put down on your new car purchase is much like the recommended down payment on a home—20%, if you can afford it. Used cars require less—10% or more.
Having a 20% down payment on a car ensures that you'll receive favorable terms on your financing, lowers the amount you need to finance, and reduces your risk of being upside down. The benefits of a higher down payment include:
- Favorable financing terms
- Lower interest rate
- Higher loan approval rates
- Lower monthly payment
- Lower total interest paid
- Reduced risk of being upside down
New vs. Used Car Down Payment
New vehicles depreciate faster than used ones. Therefore, lenders often require a larger down payment on new vehicles - usually around 20%. On a $24,000 vehicle, that would amount to $4,800, bringing the total financed amount to $19,200.
For used vehicles, a down payment of 10% or more is advisable. For a $14,000 used vehicle, that would be $1,400, bringing the amount financed to $12,600.
When putting a down payment on a new car, having a trade-in vehicle or taking advantage of manufacturer cash rebates can help you put down an even larger car down payment. This will help by decreasing the amount you need to borrow.
What About Money Down on a Lease?
Leases are different from buying a new or used car. The down payment on a lease is known as cash due at signing. This is usually a predefined amount. Paying more than that amount doesn't make sense since the purpose of a lease is to minimize the amount of cash you spend on the transaction. So stick with the amount due, no more.
The Bigger Down Payment On a Car, the Better
The more you are able to put down on your car when you buy it, the better financing terms you will likely be offered. It will also give you a better chance of being approved.
Although low interest rates are attractive, a larger down payment may sometimes reduce your monthly payments more than a lower interest rate. With luck, you will be able to take advantage of both.
When considering how much of a down payment to put on your new car purchase, keep in mind the size of your down payment impacts:
- Interest rate
- Monthly payment amount
- Accountability for depreciation
- Being upside down
Let's take a drive into understanding how these four factors are impacted by the down payment you place when buying your car.
Lower Interest Rate
A higher down payment is directly connected to the interest rate that is offered to you by a lender when you buy a car. With a higher down payment, a lender sees you as a customer that is invested in what they are buying and is generally more willing to offer favorable terms and a lower interest rate. This will save you money by both lowering your monthly payment and the amount of interest paid over the life of the loan.
Lower Monthly Payments
The more you pay upfront when you're buying a new car, the lower your monthly payments will be. The Federal Trade Commission, a government agency aimed at protecting consumers, suggests that saving for a down payment can reduce the overall amount that you will have to finance, decreasing interest costs in the long run.
Use LendingTree's auto payment calculator to see what your monthly payment will be with different down payment amounts. For example, $5,000 down on a $25,000 vehicle leads to a payment of $490, while $2,000 down on the same vehicle raises the payment to $556. That's a savings of $66 each month.
Calculate your monthly auto payment
Some industry experts say that a 20 percent down payment is ideal when you're buying a new car because it covers the first year's depreciation. That way, if something happens in the first few months of ownership, like the car being totaled in a wreck, you won't owe more on the car than it's worth.
Prevents Being Upside Down
No one wants to owe $20,000 on a car that's only worth $18,000. When it comes time to sell a car where you're upside down, you must come up with the difference in cash. In this example, that would be $2,000. If you're unable to come up with that money, you may have to roll that amount into your new car loan, putting you upside down in that vehicle and propagating the cycle.
You don't want to owe more than a vehicle is worth because if the car is totaled in an accident, your insurance company will only cover the amount the vehicle is worth, leaving you on the hook for the rest of the amount owed. One way to prevent that situation is gap insurance, however, that will cost you additional money to receive coverage.
One of the best ways to avoid being upside down on a vehicle is to avoid 0% down or 100% financing offers. With those, you will almost always be upside down because the tax, title, license, and other fees are financed into the loan.