If you’re in the market for buying a new or used car, you may wonder how much of a down payment will be required these days. Is there a minimum? Will more money down get you a better deal? And just how much will your down payment affect your monthly payments?
How much you’re willing and able to afford as a down payment on a new car is pretty much up to each buyer. But there are some things you should know about car down payments before you head to the dealership and fork one over on a car.
- A 20% down payment is the norm, but more is always better if you can afford it.
- Buyers who put down 20% or even 25% will find the most favorable rates and terms from lenders.
- Putting a larger down payment on a car helps in a number of ways—it lowers your monthly payment, qualifies you for better deals and lower interest rates, and helps with depreciation so you won’t be upside down on your car loan.
How Much Is the Norm?
Car purchases typically don’t have a minimum requirement like 20% down, although that is a common amount that lenders like to see. Conventional wisdom has typically found that about 20% down is the right amount to help make a dent in the overall amount that you’ll finance, but in practice, people put down significantly less—around 11–12%, much lower than the norm. In fact, an Edmunds analysis in 2019 found most buyers put down only 11.7%.
Get a Better Interest Rate with a Larger Down Payment
A substantial down payment of 20% or more will accomplish three things for you, notes Bryce Welker, CPA, owner of CPA Exam Guy, a study guide comparison tool for certified public accountants (CPAs).
1. You’ll reduce your monthly payment because you’ll finance less money.
2. You’ll typically get a better interest rate because, again, you’re financing less so the lender is taking less risk on you.
3. It will offset the initial depreciation hit you take as you drive your new car off the lot.
For example, if you were trying to score a deal like 0% financing, typically only offered to those with excellent credit scores, then you may be able to make a larger down payment to help you qualify for the 0% deal if you couldn’t qualify without it. The greater the borrower’s participation by putting more money down, the less risk there is for the lender—and with lower risk come lower rates.
Get Approved More Easily
Likewise, if you are a risky borrower with a lower credit score, then you may land a better rate if you pay a larger down payment. “So, it is possible that you will get approved more easily or be offered a lower interest rate if you are willing to put a bigger payment down up front,” says Logan Murray, CFP, RICP, EA, a financial planner and tax preparer at Pocket Project, a financial management site.
A scrupulous lender will still factor your credit score into the equation, but think of it as the more you put down, the better your chances of getting approved—and of qualifying for the best deals.
Lower Your Monthly Payments
What’s more, making a larger down payment will also allow you to have smaller monthly payments since you’ll finance a smaller principal amount and pay less interest over the life of the loan—things that make a larger down payment a good bet.
Upside Down Loans
When you drive your new car off the lot, the depreciation timer starts ticking. The more you owe on the car, the worse it keeps up with its deprecation value. “The bottom line is that if you put a small amount down, you may end up with negative equity in your vehicle, meaning you will owe more money than it’s actually worth, over time, so investing more up front definitely does help you avoid being upside down on your loan,” says Welker.
Is Zero Down a Bad Idea?
In rare cases, it may be OK to put zero down—or if you have no choice because you don’t have the funds to put anything down. Dealerships certainly know how to bring buyers through the door using a zero-down approach. But the only time you should really take them up on that is if you are buying the car with cash outright and they’re offering 0% financing.
In that case, you could save your cash in an interest-earning savings option and make payments on the car, all the while earning interest on your money. But be sure you won’t touch the money that you saved for the car; otherwise, it won’t make sense to pay off the 0% loan over time.
The Bottom Line
Ultimately, how much down payment you can afford will guide your decision. A great idea is to play with an auto loan calculator and enter in various down payment amounts, adjusting up or down depending on how much you can afford to put down, so you can see how your down payment will affect your monthly payments.
However, putting as much cash down on a car as you can is the secret to getting the best interest rates and to always putting yourself in an equity position.