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How Much Money Should You Put Down on a Car?

For years, the standard advice for a down payment on a new car was 20%. But that’s changed in the past few years, especially as cars have become more expensive.

And while there are still many good reasons to put that much down today, requirements have dropped to around 9% to 12%, according to Kelley Blue Book. Another prominent source for consumer auto information, Edmunds, suggests a down payment of at least 10%, which it says can help prevent you becoming “upside down” on your new car (that is, owing more than it’s worth).

Of course, you’ll see offers of zero-down-payment purchases and leases from new car dealers with incentive financing as well as “buy here pay here” used car dealerships. A zero-down purchase sure looks like a good deal, but it could cost you more in the long run.

Why put money down on a new or used car?

Making a down payment reduces the amount that you will finance and pay interest on over the life of the loan. It can come in the form of cash you pay upfront to the dealer and/or a trade-in.

“Put down as much as you can comfortably so you will be charged less interest,” said Jon L. Ten Haagen, a certified financial planner from Huntington, N.Y. “The reason to take a loan is because you do not have the money to buy the car outright.”

There are other good reasons to put money down:

Increase your chances of approval: If you have a less-than-great credit score, a larger down payment could help you secure financing or help you get a lower interest rate.

Smaller loan balance: Because most car purchases involve a loan, especially new cars, putting money down reduces the amount you borrow. That means you’ll pay less interest on the borrowed money and may have more cash left over for other things.

Better terms. With a new car, lenders will usually offer better terms (lower interest rates, for example) to buyers who pay more up front, like the old standard of a 20% down payment.

Avoid negative equity: When you’re shopping for a car, especially if you have a trade-in that you still owe on, you’ll hear the term negative equity. Being upside down means you owe more on your car than it’s worth. Cars, especially brand new ones, depreciate in value — as much as 30.5% in the first year,  according to a July 2019 Edmunds report — often faster than you are paying off the loan. You may be upside down if you make a small down payment or if the car has a low value due to high mileage or damage. A substantial down payment is a way to avoid this.

Being upside down can be a big problem if your car is totaled in an accident. If the insurance company pays you only the market value of the car, it may not be enough to satisfy the loan. You still have to pay off the entire loan even if the car is crashed or stolen.

How do you determine how much money to put down on a car?

In 2019, the average down payment for new and used cars was about 12%, according to automotive industry price guide site Edmunds. One reason for lower down payments is that the cost of cars has risen so high — $37,185 for the average new car and $20,247 for a used car, according to LendingTree — that it’s difficult for most people to scrape up 20% of the sticker price. For a car that’s a few years old, a down payment of 10% has been the rule of thumb.

While making a substantial down payment on a car purchase seems like the smart thing to do, you need to understand when it makes sense and when it doesn’t.

Malcolm Ethridge, a certified financial planner in Rockville, Md., recommends at least paying taxes and registration fees, which go into the out-the-door price, rather than folding them into your loan. “If you do roll all of those taxes and fees into the loan, you’re almost certain to have negative equity on that loan from day one,” he said.

As Chicago-based certified financial planner Leisa Brown Aiken recommends, “the down payment [you make] should be one that allows you to have [a] loan that you can pay off in no more than one-half the number of years you will drive the car.”

However, other financial experts recommend putting down as little as possible to use the money for investments. If you can invest the money in a retirement plan that earns more interest than what you’re paying on the car loan, that’s a better financial move, according to Darin Shebesta, a certified financial planner in Scottsdale, Ariz. “If your auto loan is between 2% and 5%, that’s pretty low historically, so their money could be better used investing in a Roth IRA,” he said. The average APR for LendingTree customers of all credit profiles is higher, however, at 8.35%.

Mind the GAP. If you make a small or zero-down payment, you can protect yourself with a financial product called GAP insurance, sometimes known as Guaranteed Asset Protection. Like the name implies, GAP insurance covers the difference or gap between what you owe on a vehicle loan or lease and the vehicle’s value as determined by the insurance company in the event of a total loss.

How much do I put down on a used car?

While we’ve described the reasons why a 20% down payment on a new car is a good idea, and 10% or more is the rule of thumb for used or new — if that’s the most you can afford — a used car has already depreciated or lost value from its new car price. Therefore, the down payment can be lower without leaving you upside down.

How much do I put down a lease?

You can also make down payments on a leased car. With a lease, the down payment is usually called capital cost reduction. It basically does the same thing as a down payment in a purchase, reducing the amount of money that you borrow. The value of a leased car at the end of the lease is usually predetermined, but a larger down payment will reduce your monthly payment. However, one of the benefits of leasing is the low down payment offered in incentive financing deals, which we’ll discuss more, below. In the meantime, you can read more about how to lease a car here.

 If you decide to buy — new or used — you can use LendingTree’s loan calculator to see how different down payments will affect your monthly payment.

What are zero-down car deals?

You may see ads for zero-down car financing. For new cars, a zero-down offer is usually part of a dealer financing incentive paired with a low or 0% APR. It may also be advertised as a sign-and-drive event, or something similar. The idea is, you walk into a dealership, sign your name to the financing documents and drive away in a new car. Of course, the best deals are reserved for people with good to exceptional FICO credit scores between 670 and 850.

But there are many instances when zero-down financing means the interest rate is usually higher than the rate with a down payment. These offers may be designed for those with poor credit. They may be offered at a buy here, pay here car lots where the business finances the car directly. The interest rates are often higher — sometimes much higher – than dealer or bank financing.

Shop around. No matter what your credit score is, you can opt for financing through the dealer or find your own source of financing and make a down payment in return for a lower interest rate. It’s always a good idea to do your research with your own bank, credit union or online lender so you know what APR you deserve before you get to the dealer. You could fill out preapproval forms at different lenders or fill out a single form at LendingTree where you could receive up to five loan offers from lenders, depending on your creditworthiness.

Zero-down lease deals. Leases are often advertised as zero-down because hefty down payments don’t benefit you in the same way with a lease as it would with a car purchase. With a lease, the value of the vehicle at the end of the lease is predetermined. But like a purchase, you may still be responsible for taxes, registration and acquisition fee at the start of the lease.

However, you may be able to roll those upfront costs into the lease for a true zero-down experience, according to Scot Hall, chief operating officer of Swapalease.com.

The bottom line

The down payment on a car purchase or lease can have a significant impact on your financial picture. There are options to consider, such as making a small down payment and using the money to invest. Or you could make a larger down payment so the monthly payments better fit your budget.

If you’re enticed by a zero-down offer, make sure you understand the risks of becoming underwater on your loan. Sure, you may be able to drive away with a new (or at least new-to-you) car, but it could put a pinch in your bank account for years to come. Zero-down car dealers are kind of like a free lunch – there’s really no such thing.

If you don’t make a down payment, you’ll pay more in interest and/or pay over a longer term if you need to make the monthly payment fit your budget. However, if you don’t have cash or a trade-in, a zero-down deal could put you in the vehicle you need.

The answer to the question of “How much should I put down?” will depend on your financial situation. Be sure you understand the tradeoffs you’ll make and how that affects other aspects of your financial health.

 

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