Down payments on a car: How much should you put down?
Quick insights
- A large down payment may help you secure a lower interest rate and/or better loan terms, potentially reducing the total cost of borrowing and depreciation impacts.
- You might aim for at least 20% down on new cars to match depreciation rates and consider higher down payments to help improve loan approval chances.
- While low down payment options may make buying a new car more accessible, they often lead to loans that carry higher interest rates and may lead to negative equity, making them costlier in the long run.
Purchasing a car often involves making several key decisions. You may need to decide which lender to use, the amount you might borrow, the cost of ownership and whether you’re prepared to make that financial commitment. Among these many decisions lies the question of making a down payment.
What is a down payment on a car?
A down payment is a lump sum of money you pay upfront when purchasing a car. This initial payment represents a percentage of the vehicle's total purchase price, and the remaining balance is typically covered by an auto loan.
Potential benefits of putting a down payment on a car
Borrowers may consider putting a down payment on a car because it typically provides a few benefits, such as:
- Lower interest rates: A higher down payment may help you secure a lower interest rate and better loan terms.
- Reduced borrowing costs: By financing less, you may possibly enjoy a more affordable cost of borrowing over the life of the loan.
- More equity: Since a new car could depreciate by as much as 20% during the first year, a larger down payment might help you maintain more equity in your vehicle than you would with a low or no down payment.
How much should you put down on a car?
An upfront down payment of around 20% on average, especially when you’re looking to finance a new car, is often recommended. This is usually because new vehicles tend to depreciate by a similar percentage during the first year. The financing structure could also specify the minimum down payment requirement, but this might vary among different lenders. This down payment percentage may be less when purchasing a used car, but in general, you may consider aiming for a value of at least 10%.
When you have a low credit score, a higher down payment might help increase your chances of getting a loan approved. It might also make sense if your aim is to minimize your overall borrowing cost. A higher upfront payment could help reduce the lender’s risk exposure and enable you to negotiate a better interest rate for your auto loan.
Another consideration is that a down payment doesn’t always have to be in cash. It could also be in the form of the trade-in value of your existing vehicle or a combination of both.
Can you buy a car with a small down payment?
It’s possible to buy a car with a small down payment, and some lenders offer zero down payment options. While programs like $500 down payment cars may sound appealing if you’re on a limited budget, it may help to understand the potential risks. For example, lenders offering these deals may impose higher interest rates or require a higher credit score to offset their risk.
When a smaller down payment makes sense
Here are some situations when you might consider a smaller down payment:
- Keeping extra savings: You might prefer to keep your cash on hand for emergencies or other financial goals.
- Planning to trade in: If you plan to trade in or upgrade your vehicle in a few years, a smaller down payment might align better with your short-term ownership.
- Qualifying for an intro APR: If you qualify for a promotional APR financing offer, putting less money down allows you to borrow money while paying less in interest.
- Increasing accessibility: If you’re unable to make a large upfront payment, a smaller down payment might make purchasing a vehicle more accessible. You may also be able to cover this amount using cash or the trade-in value of your old vehicle.
While a smaller down payment offers flexibility, it may be helpful to keep the potential drawbacks in mind. Low down payment offers might be limited to lower-priced vehicles. Additionally, financing a larger portion of the car's value typically results in higher interest rates, larger monthly payments and a greater risk of negative equity.
Additional considerations for putting a down payment on a car
While low down payment options are available, making a larger down payment could be advantageous in the long term. This could be a reachable goal with some thoughtful pre-planning.
- Budgeting and saving: Preparing a budget and cutting unnecessary expenses may help you save. Chase checking account and savings account customers can use Autosave to help set aside funds at regular intervals.
- Building your credit score: You may want to work toward building your credit score by minimizing debt obligations and making bill payments on time.
- Managing expectations: Being realistic about the type of vehicle you can afford might help improve your financial health in the long term.
In summary
Deciding how much to put down on a car depends on your financial situation and goals. While a larger down payment may help you secure better loan terms and build equity faster, a smaller down payment might make sense if you want to preserve your savings. You might consider weighing the potential benefits and drawbacks to help you choose the financing path that works best for you.
