Whether you’re trading in your clunker or treating yourself to the hot wheels of your dreams, figuring out the best way to pay for your new car should be at the top of your list. Unless you’re planning to use cash to purchase an inexpensive used car, it’s likely you’ll have to take out an auto loan and make a down payment. But how much should you spend on a car down payment? As much as possible? As little as you can?
A down payment is important because it reduces your monthly loan payment and shows the lender that you can afford a new car. While there are a variety of financing options available for all budgets, it’s important to choose carefully and find auto loan rates and terms that work for you.
Ultimately, the amount you put down depends on what you can afford. Here are some specifics to consider.
Down payment percentages
The average price of a new car is $35,309, and the value depreciates as soon as you drive it off the lot. According to Experian, the average monthly car payment is $506 and the average loan period is 68 months. 20% is the recommended down payment amount, but some buyers choose to pay as little as 10% (source).
If you don’t have the cash for a 20% down payment, it’s wise to wait until you’ve saved up. Some lenders, such as LightStream, will offer lower rates to those who make a larger down payment. The less you pay upfront, the higher your monthly payments will be, which means you run the risk of being upside-down on your loan (owing more than your car is worth).
If you end up underwater on your loan, you might have difficulty purchasing a car in the future. It will be more difficult for you to qualify for a new loan and you might not be able to trade in your old car.
Purchasing GAP insurance or new-car replacement coverage can help protect you if you choose to pay less than 20%. GAP insurance protects you from having to pay off the remainder of your auto loan if your car is totaled.
“Be patient,” says Sam Olmsted, a consultant for Superior Honda in Harvey, LA. “Work backward to base your car options on your finances, rather than manipulating your finances to buy your dream car.”
Zero down payment
While “no money down” deals may be tempting, the chances of qualifying for one are slim. You must have excellent credit to be approved and you may have to miss on other perks to qualify. This article provides a detailed analysis of the pros and cons of 0% APR auto loans.
A zero percent down payment is a good option if you can manage your money better than a car loan can, says Olmsted. For example, if you put the cash you would use on a down payment into an investment fund rather than into auto financing, you might want to choose a zero percent down deal.
Low Credit Scores
Most online lenders require a good credit score. However, that doesn’t mean you can’t buy a car just because you have less-than-perfect credit. There are a number of lenders who offer loans to people with poor credit.
For example, SpringboardAuto.com considers borrowers with credit scores as low as 500. They also offer loans for new or used cars.
If you have a credit score of 620 or below, you can increase your chances of being approved for a car loan by making a bigger down payment. Longer-term loans of six years or more are an option, but your interest payments will be much higher.
If you can’t afford a 20% down payment, you may want to consider purchasing a used car. The prices are lower and the average down payment is 10%.
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The bottom line
The bottom line is that finding the best car loan isn’t a one-size-fits-all type of situation. Everyone’s situation is unique, which is why you have to be careful when shopping around for an auto loan. The good news is that we’ve taken care of the hard part for you.
SuperMoney’s loan offer engine will help you narrow down your options and our review page allows you to compare rates and terms of all the top lenders in the country so that you can get the best deal.