If you’re in the market for a new car and have done any research, chances are you had a slight case of sticker shock. On average, new cars start at $20,000 for smaller models and go as high as $55,000 or more for midsize luxury models, notes Kelley Blue Book. And buying used won’t necessarily save you a fortune, either. It just depends on the make and model you select. So it’s no surprise that prospective buyers usually explore financing instead of forking over their hard-earned cash to buy a new ride.
But here’s the thing: financing comes in different shapes and sizes. It’s all a matter of your credit rating, what you want your monthly payments to look like, how long you want to pay on the vehicle, and how much cash you can afford to bring to the table.
The good news is many lenders offer flexibility with regards to down payments. Some require a set percentage, depending on your financial background, while others may allow you to sign on the dotted line and drive off in your new ride without spending a dime. If you have the option to put little to no money down but can’t quite decide which route is best, here’s how to come up with a figure that makes sense.
What Is a Down Payment?
In a nutshell, a down payment reduces the total amount borrowed from the lender for your new car purchase. So the more you put on the table, the lower your payments will be and the less you’ll pay in interest over the life of the loan.
To illustrate, if you purchase a vehicle with a sales price of $25,000 and no down payment, the amount financed will be equal to the full purchase price plus the applicable taxes, fees, and cost of registration. But if you decide to put $5,000 down, it will be used to reduce the total cost of acquiring the vehicle.
Why Some Lenders Require a Down Payment
It’s all a matter of risk. If a lender feels that the likelihood of you defaulting on the auto loan is little to none, they may offer you financing with no money down. This is usually gauged by your creditworthiness, as evidenced by your FICO score, along with your payment history with regards to past auto loans.
If you have an excessive history of late payments or your credit file contains repossessions, a no-down payment auto loan probably won’t be an option for you. But if you’ve historically made your payments on time and have a decent credit score, you shouldn’t have a problem.
Why a Down Payment Matters
Even if all the lenders you consider for an auto loan give you the option to not put money down, should you take advantage? It depends, but you could miss out on some key few benefits, including:
Lower Monthly Payment
As mentioned earlier, a down payment lowers the amount you have to borrow from the lender to secure your new ride, which means a more affordable monthly payment.
Scenario 1:
| Total Loan Amount | Interest Rate | Down Payment | Loan Term | Monthly Payment |
| $22,500 | 3.00% | $0 | 36 months | $654 |
| $22,500 | 3.00% | $3,000 | 36 months | $567 |
Scenario 2:
| Total Loan Amount | Interest Rate | Down Payment | Loan Term | Monthly Payment |
| $27,500 | 4.00% | $0 | 48 months | $621 |
| $27,500 | 4.00% | $5,000 | 48 months | $508 |
Lower Interest Rate
Putting money down a new ride doesn’t guarantee that you’ll receive the most competitive rate on your loan. However, it can make a major difference if your credit isn’t up to par. Why so? Well, by offsetting the loan amount with your cash, the transaction will be less risky to the lender because they are not putting as much of their capital on the line.
Less Paid In Interest Over the Life of the Loan
Scenario 1:
| Total Loan Amount | Interest Rate | Down Payment | Loan Term | Monthly Payment | Total Amount Paid In Interest | Total Loan Cost |
| $32,500 | 3.00% | $0 | 60 months | $584 | $2,539 | $35,039 |
| $32,500 | 3.00% | $1,500 | 60 months | $557 | $922 | $33,422 |
Scenario 2:
| Total Loan Amount | Interest Rate | Down Payment | Loan Term | Monthly Payment | Total Amount Paid In Interest | Total Loan Cost |
| $35,500 | 3.5% | $0 | 72 months | $547 | $3,909 | $39,409 |
| $35,500 | 3.5% | $2,000 | 72 months | $517 | $1,689 | $37,189 |
Minimizes the Impact of Depreciation
Did you know that the moment you drive off the lot in a new car, it depreciates? The same rule applies to used cars; as time progresses and mileage increases, the resale value gets lower and lower. While GAP insurance can help you avoid a financial disaster if your car is totaled in a crash and you’re upside down in the loan by paying the difference, what happens if you want to sell?
This is exactly why putting money down may be worthwhile. If you decide in a few years that the car no longer fits your needs, you should be able to sell the vehicle without shelling out a load of cash. You may be able to walk away with some money in your pocket if you made a hefty down payment.
Larger Loan Amount
When determining how much of a car loan you can afford, lenders look at your current monthly debt obligations and how they stack up to your income. Since the down payment lowers the monthly payment amount, you may be able to qualify for a larger loan amount by putting money down.
Greater Approval Odds
In some instances, the difference between a yes and no on an auto loan application is the down payment. This is especially the case for individuals with checkered credit histories. While you may not get the best rate out there, at least you’ll have a chance to finance your new ride. And you can always refinance later when your credit rating starts to improve.
How Much Money Do You Need for a Down Payment?
Looking for the golden rule for auto loans? Some financial experts will tell you that 20 percent is sufficient while others will urge you to either finance the entire amount to keep your hard-earned cash in your pocket for a rainy day. And then you have others that despise the entire idea of auto loans and advise all consumers to pay cash.
So, it just depends on your finances and personal preferences. What matters to you most: less on the table upfront or a lower monthly payment? If you don’t have the funds to make a down payment but need a car in a jiffy, then it may make sense not to put money down. But if you want the lowest payment possible with minimal interest over the life of the loan, then you probably don’t want to skip out on the down payment.
But keep in mind that even if you’re unable to shell out cash upfront, you can still refinance at a later date to lower the monthly payment (although doing so means you’ll pay more in interest over the life of the loan if you don’t pay it off early).
Another Option: Increase your monthly payment amounts and pay off the loan early. As long as there aren’t any prepayment penalties, you could save a bundle in interest.
Run the Numbers
Do you have a particular monthly payment in mind? (When calculating this number, don’t forget to factor in the costs of auto insurance, gasoline, routine maintenance, and repairs.) Once you have a concrete figure that works for your spending plan, use an auto loan calculator like the one found here to gauge the maximum purchase price based on what you’re willing to spend per month.
Now compare this amount to the purchase price of the vehicle you have in mind. Is it much higher or lower than you anticipated? If it’s lower than the cost of the vehicle you’d like to buy, you want to put down at least enough to get the total loan amount to a comfortable number and lower the monthly payment.
So, if the anticipated loan amount is $27,000 but your budget only allows for a monthly payment on a loan of $23,000, you’ll want to put at least $4,000 down.
And even if you find that you have a ton of wiggle room in your budget because the estimated payment allows you to buy a more expensive car than you had in mind, it’s still not a bad idea to put money down, even if you decide to go the cheaper route.
How to Save Up for a Down Payment
Ready to start socking away cash for a down payment? Some options worth considering:
Trade-in Your Old Ride
While this doesn’t exactly fit the bill of saving up for a down payment, trading in your old ride could do wonders for your new auto loan payment. If you still owe on your car, doing so is a no-brainer to wipe out the existing loan. But what if the car is paid off? Well, unless you want to spend months saving up thousands for a down payment, you can have the capital you need in an instant by trading the car in.
It may be tempting to keep your old ride if there’s no loan on it, but saying goodbye also minimize gasoline, insurance, and auto maintenance costs while making your new car more affordable. Thus a win-win for you.
Sell Your Old Ride
Don’t like the trade-in figure the dealer gave you? Consider selling your current vehicle to a private party and using the cash for a down payment on your new car.
Trim Your Budget
If you don’t have a car to trade-in or sell, another way to save up for a down payment is by paring down expense items in your budget. Unless you have far more bills than money, which could signal bigger issues that need to be resolved before buying a car, there are ways to cut back.
Earn More
Not interested in cutting back for the sake of saving up for a down payment on a car? Explore ways to beef up your income. You could ask for overtime at work, pick up a temporary part-time job, or try out a side hustle. By being persistent, you’ll get the funds you need in no time.
Borrow From Relatives and Friends
This should be done as a last resort if you need a car fast, the lender is requiring a down payment, but you don’t have any other options. Reasoning: relationships tend to get a bit complicated when you realize you’re too overextended to pay the loan back promptly or are unable to pay the loan back at all. The person who loaned you the money could easily get the impression that you’re irresponsible and feel they were taken advantage of.
The Bottom Line
While there is no hard and fast rule on how much money should put down to purchase a car, there are more benefits to handing over your cash than financing the entire purchase. But if you choose not to, you can minimize costs incurred over the life of the loan by paying it off early.