It’s estimated that as many as 20% of Americans have been shopping for a new car in the past year. Many of these shoppers are new car buyers who have never been through an auto financing deal.
If you fall into this category, it’s vital to understand concepts like a vehicle down payment. Unfortunately, there’s a lot of confusion surrounding the correct down payment amount for a car.
So, how much should a down payment on a car be? This guide will discuss the topic of down payments in more detail. That way, regardless of whether you’re getting a new or used car, you’ll get the best deal possible.
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What Is a Down Payment on a Car?
Before we learn about how much to pay for a down payment, it’s important to first know exactly what it is. When you finance a car (meaning you take out a loan to purchase it) your down payment is the initial amount of money that you pay upfront.
This is applied toward the car purchase price of the car which reduces the amount that you need to borrow. Car dealerships and lenders like large down payments because it minimizes the amount of money they need to loan, which in turn minimizes their risk in the transaction.
As such, they’ll typically offer more favorable financing deals for a larger car loan down payment.
Some lenders require a specific down payment represented in a percentage of the cost, along with a favorable credit check. Others require no down payments at all. It all depends on who and where you buy your car from.
How Much Should a Down Payment on a Car Be?
The common advice goes that you should put at least 20% down for a new car and 10% down for a used car. However, at the end of the day, it’s completely up to the buyer.
This year sparse inventory continues to cause car prices to skyrocket. As such, many people simply can’t afford to put a whole 20% down on a new car.
At the end of the day, you should put down what you can afford to. However, if you’re able to put 25% or even 30% down, you should go for it. As we’ll see, there are a lot of benefits that come when you’re able to provide the money upfront.
Why It Helps to Put More Money Up Initially
The biggest reason you want to put up money for a down payment is to get a lower APR interest rate. Your interest rate is the percentage of the total price of your car that you will need to pay back to the lender over the life of your loan.
Higher interest rates spread out over longer loan periods can significantly increase the overall price that you pay for your automobile. However, when you put down money upfront, it makes you a low-risk borrower.
That means that you’ll get a much lower interest rate. That translates to less money paid throughout your loan, especially if you’re able to get a short pay period. What’s more, down payments also translate to less money paid monthly.
As such, it’s much better for budgeting because your car payments aren’t taking up a huge percentage of your income. Down payments can help you avoid upside-down loans. This occurs when depreciation on your vehicle (which occurs the second you drive it off the lot) exceeds the amount you owe.
You’ll end up with negative equity on your vehicle because, by the time you sell it, it won’t be worth what you paid for. Lastly, a down payment can help you get approved for a loan more easily.
This approval rate is especially important if you haven’t established credit yet, or you have a poor credit score. Because you’re less of a risk, lenders are more likely to work with you.
Is a 0% Down Payment a Bad Idea?
If you can’t afford a down payment you might be eyeing dealerships that offer 0% down payments on your financing. But is this a good idea? From a financial standpoint, it’s usually not.
The trade-off for putting 0% down is that you get a high-interest rate for your loan. That means you’ll pay a lot more money for the vehicle. And, because you don’t have an initial lump payment on the loan it means that it will take you longer to pay it back.
So in most cases, a 0% isn’t a great choice financially. That being said, for people who don’t have the money to put down, it can sometimes be the only option.
However, the only time it can benefit you financially is if you’re able to buy the car outright with cash while taking advantage of 0% financing.
What Should You Do If You Can’t Afford a Down Payment?
If you can’t afford a down payment and don’t want to take out a 0% loan with unfavorable rates, you might be wondering what to do. One option is to wait and save until you have enough for the down payment you want.
However, many people require their vehicle for work and don’t have the privilege to wait for one. In these cases, you might want to consider leasing something like a new Honda.
When you lease a vehicle you’re essentially renting it from the dealership. The benefits are it’s much more affordable, you deal with fewer repairs, and you get to drive the latest and greatest cars.
The downside is that it comes with a mileage limit, so it’s not a great option for people who need to drive around a lot for work. Still, if you can’t afford a down payment or financing, leasing it’s a great alternative for getting a vehicle.
Want More Car Advice? Keep Exploring
We hope this guide helped you answer the question, How much should a down payment on a car be? As you can see, the answer to this question is whatever you can afford.
The more money you can put into your down payment, the more advantageous your financing deal will be. So take a look at your budget to come up with a good figure before you begin shopping.
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