If you are ready to start shopping for your next vehicle, you might wonder how much you should put down for your down payment.
Depending how much you put down will impact your monthly payments and your loan terms.
However, did you know it can also impact your credit score?
For example, putting down a small down payment like 0% - 5% means you will have to borrow more and carry more debt when financing a vehicle.
This might even leave you underwater if you owe more than the vehicle is worth, so it's important to decide an amount to limit your risk.
I will cover what exactly is underwater regarding your auto loan.
Experts suggest at least 20% of the total purchase price as a down payment for new cars.
This reduces the total amount you are borrowing and insulates you on the 20% depreciation on new cars in the first year. The bigger the down payment, the better when you are financing.
The larger down payment also reduces your LTV loan-to-value ratio. If the vehicle is worth $30,000, you only need to borrow $20,000.
You will always stay ahead of depreciation, and the vehicle will always be worth more than your loan.
As mentioned, 20% or more is a good guideline for an average down payment. However, if you borrow $30,000 on a $30,000 vehicle, you are at greater risk of the vehicle being worth LESS than your loan. Thus putting you underwater with negative equity.
Remember daily living costs like food, housing, and entertainment when purchasing a vehicle.
A small down payment might seem like you are saving money initially but could lead to negative equity later.
Factors to Consider in Choosing Car Down Payment and Purchase Price
To make the best decision on your car down payment, consider the factors that affect it.
- Financial capability
- Type of car
- Loan terms
- Interest rates
These are the key factors that can significantly impact your down payment.
I will explain how each of these factors will impact your down payment in one way or another and help you decide the down payment amount for your car purchase.
Your Financial Capability
I always tell my readers that you should lower your monthly payment as best as possible. A heavy monthly payment each month is a good way to torture yourself.
Ideally, you will have a good amount of money saved up for your vehicle purchase, but having a minimum of $2,000 to $3,000 is a good place to start to reduce the loan balance.
As mentioned, 20% of the purchase price is great, but any over $1,000 will get the ball rolling.
First, look at your earning income and overall expenses to make an informed decision on your car down payment. For example, consider your income, expenses, and savings to determine a comfortable sum.
While a higher down payment reduces your loan principal, which lowers your monthly payments and total interest, good credit history will also help secure a lower interest rate.
After subtracting your down payment, I recommend that you keep at least 3 months of living expenses, if not more, for emergency savings. This will provide a cushion for future emergencies.
You don’t want to wipe out your entire savings unless you have enough runway to cover fuel, insurance, and other vehicle-related expenses, especially if you have poor credit.
Average Cost of a Car Down Payment
The latest figures show that Americans' average down payment is around $6,000. This has been impacted by the rising costs of car prices overall.
This is based on the average vehicle price of just over $40,000. However, if the vehicle you are looking at is considerably less, your down payment will reflect that.
Remember that luxury vehicles depreciate faster than the average car, so your overall equity will drop after a few years.
Researching the price range and financing options for the car you want to buy is important. Luxury cars usually cost more for insurance and maintenance than sedans. You need to plan if you're thinking of buying one.
Dealerships need a method to ensure that car buyers could afford the car because saving for the entire amount would take at least a year. Did you know that requiring a down payment for cars started way back when automobiles in the early days? Even now, this practice remains a safeguard for buyers and sellers during transactions. It is a way to continue growth in the automotive industry.
Loan Terms and Interest Rates
Let’s quickly review loan duration and interest rates.
The loan term is the length of time of your auto loan financing.
- Typically, I aim for 48 or 60 months to help spread the monthly payments. But short terms are better if you can handle the monthly payments. This will help soften the monthly amount and allow you time to enjoy the vehicle.
- For example, you can look into 36 months, but I suggest that if your income allows for high monthly payments, you do so.
Sure, you will be done paying off the vehicle sooner, but you should have a similar option to increase your payments sooner for 48-60 month terms. Pre-paying the entire balance should not have any penalty but give you flexibility to pay off sooner rather than later.
To help you decide what will suit you, here's a table of different loan terms and interests rates:
The concept is that shorter loan terms, with higher monthly payments and lower interest rates, are great for reducing interest expenses.
Recommended Percentage of Car Downpayment
To determine the ideal car down payment amount, you try the 20/4/10 rule which follows:
- 20% Down payment based on the value of the vehicle
- 4 years or 48 months for the loan terms.
- Total transportation costs should be 10% or less of your monthly income. This would include insurance, auto loan, and maintenance.
Many financial advisors preach This general rule of thumb to their clients. However, it is a relatively easy and fast rule to live by.
Adjust the down payment to 10% for used cars since depreciation should have worked in your favor.
Let’s see if $2,000 is a good down payment on a car.
10% vs 20% Downpayment Comparison
While these are just guidelines, your situation might be very different. But remember, a bigger downpayment will keep you afloat on the value of the vehicle, save you money on interest, and shorten your loan.
However, your monthly payments will be higher since you have to cover more ground quicker.
Sometimes dealerships have low to zero percent financing for qualified buyers. But check the fine print to see if the long terms are short, like 36 months.
For example, Ford currently offers 0% financing for 72 months and 36 months, depending on the model and excellent credit score.
Some Risks of Low Car Down Payment
For example, is $1,000 enough for a down payment on a car?
Having a low or zero down payment is a good option. It is if you are leasing. However, I will review some of the key considerations of having a low car downpayment.
- Monthly Payments will be higher. The total price of the vehicle will need to be paid by the end of the loan.
- Underwater Loan at risk. You might owe more on the vehicle if you ever needed to sell it. At that point, you will be responsible to pay the difference on the lien to release the title.
- Higher Interest Rates are possible. Low or no money down can result in higher interest rates.
- Extended Loans Terms, Small down payments will result in longer loan terms. While your monthly payment might look attractive, you might pay more interest rates than a shorter loan term.
Strategies to Help Increase Car Down Payment
If you are coming up short on an ideal car payment, you should save more money elsewhere. As I always share with my readers, there will always be another opportunity to buy a vehicle.
THERE IS ALWAYS SOMETHING OUT THERE in the marketplace.
Ready to increase your saving for your next down payment?
- Set a target, decide your need, and create a budget plan.
- Cut expenses - reduce discretionary spending and evaluate costs.
- Sell Old items - free up some cash by selling unused items locally
- Earn more - get part-time work, freelance, or sell items.
Saving for your next vehicle is exciting, but you should do your best to be fiscally responsible. Now you know why your down payment helps dictate how your next 3 - 5 years are with your car payments.
Paying upfront might sting, but you will benefit greatly financially in the long run.
Final Car Buying Tips
Remember to consider how much impact choosing your down payment amount will have on your finances when purchasing a vehicle. It's essential to carefully consider key factors such as your monthly budget, overall credit score, and anticipated future plans before committing.
Don't be afraid to walk away if the financing deal is unfavorable. Spending time bargaining hard when speaking with the salesperson is draining.
You are taking these steps to decide the best approach for your down payment based on your unique situation over the long term.
Have faith that with your newfound understanding and careful calculations, getting behind the wheel of your next vehicle won't feel like an impossible feat anymore.
Frequently Asked Questions
Q: How much should I put as a down payment for a car?
A: The general rule of thumb is to put down at least 20% of the car's purchase price as a downpayment.
Q: Can I put less than 20% down on a car?
A: Yes, it is possible to put down less than 20% on a car, but it may result in higher monthly payments and additional interest charges over the life of the loan.
Q: Will putting more money down on a car loan save me money in the long run?
A: Yes, putting more money down on a car loan can save you money in the long run by reducing the amount of interest you pay over the life of the loan.
Q: How does my credit score affect my down payment?
A: A higher credit score may result in a lower down payment requirement, while a lower credit score may require a higher down payment to secure a loan.
Q: Are there any other factors I should consider when deciding how much to put down on a car?
A: Yes, other factors to consider include the length of the loan term, your monthly budget, and any other financial obligations you may have.