The most common way to purchase a vehicle is through financing it. Car loans account for almost 90 percent of new car purchases and over 50 percent of used car purchases. In 2017, the Federal Reserve reported that a record 107 million Americans, or 43 percent of the adult population, were paying off a car loan.
Because financing a car, truck or SUV purchase is more commonplace today than ever before, you may be asking yourself how much should your down payment be? A down payment is the amount of money you pay toward the purchase price of a car. The down payment helps you reduce the size of your loan. And, the recommended amount can vary based on the year and kind of car you’re buying.
- Down Payment on a New Car? Typically, you should try to make a down payment of at least 20 percent of the cost of the new vehicle. This increases your odds of a lower interest rate, lowers your monthly payments and helps you avoid having an “upside down” loan, which means you owe more than the actual value of the car. The 20-4-10 rule of thumb is a good place to start. It means 20% down payment, 4-year loan term and your vehicle expenses should be no more than 10% of your gross income (including loan payment, insurance, gas, and maintenance). Although 20 percent is the agreeable percentage for a new car down payment, you should try to pay as much as possible in the beginning. The more upfront money you put down, the better position you’ll be in when you get ready to sell or trade in for an upgrade down the road. Do what you can to save as much money as possible before heading to the dealership. If you have a car to trade in, don’t forget that you can put the trade-in value of that existing vehicle as part of your down payment. Just know that you will have you pay off any existing loan amounts on the trade in.
- Down Payment on a Used Car? Most of the time used cars have already surpassed their immediate depreciation. As a result of this, the recommended minimum down payment for a used car is usually lower than that of a new car. Typically, it is around only 10 percent of the vehicle’s cost as opposed to 20 percent, but as we mentioned before, it’s always a good idea to pay more upfront if you can afford it. The more money you can put into a down payment, the better your odds are of a loan approval at a lower interest rate.
- Down Payment on a Car Lease? In contrast, if you are thinking about leasing a car, you should only pay the required cash due at signing. One of the main advantages of leasing is that you can minimize your upfront costs, so putting more money down, in the beginning, is contradictory to that advantage.
So, the bottom line is while most people will tell you that you need to put down 20 percent for a new car and 10 percent for a used car, it’s in your best interest to maximize your down payment regardless of which one you decide to buy. Be sure to make a budget and calculate how much you can afford for a car (new, used or leased) before you start researching for the perfect vehicle for you. Once you have all these boxes checked, it’s time to head to the dealership.