How Much Money Should You Put Down on a Car?
Contrary to popular belief, there’s no set percentage for how much you should put down on a car. In the past, the required down payment on a car was often 20% for new and used vehicles. In recent years, however, drivers have been putting less money down, with requirements as low as 9%.
The best answer to how much money should you put down on a car is “as much as you can reasonably afford.” The more you put down, the more likely you are to be approved for a loan — especially if you have bad credit. Making a larger down payment will also save you money on interest in the long-run.
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Here’s why you should put money down on a car
You may be able to purchase a car with a small down payment — or even with no down payment — but there are a lot of good reasons why you should make a down payment on a car. For one, the bigger the down payment, the less money you’ll have to borrow from a lender.
Here’s what you stand to gain:
- You’ll pay less interest. Interest charges are based on how much you owe on your loan — so the less money you borrow, the more you’ll save. Plus, making a larger down payment can result in getting approved for a lower interest rate, or even qualifying for a special rate incentive program through your dealership.
- It can reduce your monthly payments. Paying more upfront can help reduce your monthly loan payment. According to Edmunds, you can expect your monthly payment to drop by roughly $15 to $18 for every $1,000 you put down.
- It can be easier to get approved. Some lenders won’t approve you without a down payment, (or with one of less than 12%), and you may be limited to dealerships that offer extra-high interest rates on financing.
- You’re less likely to be “underwater.” Being underwater — having negative equity — happens when you owe more money than your car is worth. Someone who doesn’t make a down payment can go underwater right away, since a new car’s value can drop as much as 30% in the first year. Making a larger down payment helps buyers avoid negative equity on their car loan and prevent them from facing major financial losses if the car gets totalled or stolen.
Can you get a car with no down payment?
Some car dealerships specialize in loans for no money down, but this type of loan may not result in getting the best deal. Alternatively, reputable lenders may provide “zero down” loans to people with excellent credit. Be sure to weigh the pros and cons of no money down cars:
| Pros | Cons |
|---|---|
Avoid having to hand over money for your purchase Faster than waiting and working to save up cash | You'll have to borrow more money from the lender Pay higher interest rates and higher monthly payments Go underwater faster You may have to opt for a longer loan repayment term Higher risk of predatory lending or repossession |
How to protect yourself if you buy a car with no money down
- Consider gap insurance. With no down payment, you can go underwater as soon as you drive the car off the lot. If the car is totaled or stolen, standard insurance will only cover what the car is worth, meaning you’d have to pay the additional amount you owe to the lender out of your own pocket. Gap insurance can help you avoid having to pay off your negative equity.
- Get a cosigner. Having a cosigner — a person who agrees to take full responsibility for the loan along with you — can help bring your rates down. While the lack of down payment makes you a risky borrower, having a second person cosign on the loan assures the lender of less risk.
- Buy a cheaper vehicle. You can reduce your loan amount and financing charges by buying a cheaper car. To reduce your costs, look for an older model vehicle, a base trim model or opt for fewer features. Try focusing on the features you need and avoiding the expensive nice-to-haves.
- Use a trade-in as your down payment. If you’re in a position to trade-in your current vehicle, the dealer may accept the car’s value as a down payment toward your new car. Just make sure to take the time and negotiate a fair price on your trade-in from the dealer. As an alternative, you could sell your current vehicle yourself and use the cash to put some money down on your new car.
- Consider refinancing. If you get a loan with high fees or an expensive payment, refinancing can help. Once you’ve improved your credit by making on-time payments, or paid down some of your loan balance, you may want to apply for an auto refinance loan to help you save money.
Frequently asked questions
Can you buy a car with no money down?
Yes. Some dealerships specialize in no-money-down financing for buyers with poor credit — however, these loans tend to come with high finance charges. Other dealerships may offer special “zero down” deals for buyers with excellent credit.
What is a good down payment on a car?
There is no set percentage, but experts generally recommend paying as much as you can afford without depleting your emergency savings or putting your finances in jeopardy. However, you may find some lenders require a minimum of roughly 12% for new cars and 9% for used cars.
What are acceptable forms of down payment for a car?
The most common form of down payment is cash or its equivalent. Dealerships generally accept personal checks, money orders or even credit cards. You can also trade-in your vehicle as a form of down payment for your purchase.