How Much Should My Car Down Payment Be?

As you probably know, a mortgage company requires a down payment before you buy a house. By putting money down upfront, the borrower shows that they’re fully invested in the property. Plus, saving up for a down payment requires patience, determination, and responsible money management – these are all things that lenders like to see.

Purchasing a car works the same way. It’s the second largest purchase most people make, and one for which many have to take out a loan. Unless you have an excellent credit rating, you’ll probably have to put a down payment in to qualify for the loan.

Much like a down payment for a house, the optimal down payment for a car varies based on the vehicle you’re interested in, your current financial situation, and the requirements of the dealer. Read on for a breakdown of how much you should be putting down.

How much should a car down payment be?

If you’re buying a new car, most dealers want to see at least 20% down. A 2016 report from Kelley Blue Book found that the average price for a new car was $33,666, so a 20% down payment would be $6,733.20.

Fortunately, if you have a car you’re trading in, you can subtract that value from the down payment. Any rebates will also count towards the down payment. Like mortgage lenders, many car dealers will accept less than 20% down, especially if you’re buying a used car.

Try to pay the full amount if you can, as putting in 20% will increase your chances of getting a better interest rate for your loan and a smaller monthly payment. Many financial experts recommend putting down a bigger down payment so you can minimize the debt right away.

“It is not worth going broke over a car, so if you have any doubt about making the monthly payment, save a little bit more for your down payment to lower what you owe each month,” said Eric Rosenberg of Personal Profitability.

Another reason to put down 20% on a new car is because it depreciates so quickly. If you don’t have a down payment and have no equity in the vehicle, you’ll be underwater on the loan. That’s fine until you need to sell the car and find that it’s not worth the amount you owe. If you do put at least 20% down, then you should be in better shape if you end up having to sell the car quickly.

How to afford your car down payment

Downsize your expenses

If you’ve looked through your budget and can’t find any extra funds to save for a down payment, it’s time to make some changes. Make a list of every expense that’s not a necessity and rank them in order of most important to least important. Cut enough expenses to reach an amount that you can save to get your down payment.

Use a credit card

Ask the dealer if you can pay for the down payment with a credit card. Not every seller will allow this, but it’s worth asking. A credit card likely has a higher Annual Percentage Rate (APR) than the car loan, so this strategy only works if you need to buy a car ASAP and don’t have the cash on hand.

Make automatic transfers

To save up for a down payment, start making automatic transfers into a savings account based on how much your car loan will cost each month. For example, if the car you’re looking at will have a monthly payment $300, then set up a transfer of $300 every month. That will help you save for a down payment while also giving you a taste of what your budget will be like once you add in a car loan.

Save any windfalls

If you get any random windfall, like a tax refund or bonus from work, stash it in a savings account. Most of us get windfalls and mindlessly spend them, but, if you save them, you could easily get enough for a down payment.

Next step

Before you decide what kind of down payment you want to make, look at the auto loans available to you. You can refine lenders based on credit score, the amount needed, types of fees, and the seller. Compare their offers by term length, interest rate, fees, and total loan amount.

You can also put in your information and the type of car you’re looking at to determine your pre-approved rates, without a hard inquiry on your credit report. You can also compare the terms by changing how much of a down payment you want to put down. See for yourself how the interest rates and monthly payments change as you adjust the down payment.

As complicated as it can get to analyze the various factors that go into figuring out how much you should put down, the question really boils down to this: how much can you afford? If you can’t afford 20%, you might want to look at another vehicle. If 20% is no problem, why not shoot for more?

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