Nearly 90% of new car buyers and more than 50% of used car buyers take out a loan to finance their purchase. That means most car buyers grapple with a big decision: How much of a down payment should you on a car?
The down payment is money you put toward the purchase price of the car. It reduces the size of your loan. Your down payment can come from the cash you bring to the table, the trade-in value of your current car, or some combination of the two.
If you have a good credit score, you may be able to get a car loan that requires a small down payment of less than 10%. If you have bad credit, a bigger down payment may be just the ticket to convince a lender to offer you a loan.
See also: What Credit Score Do I Need to Buy a Car?
Here are four key questions to consider before you start shopping for an auto loan:
1. How Big a Down Payment Should I Make on a New Car?
If you can afford a 20% down payment, it can be a smart move. Lenders will typically offer better terms to borrowers who make bigger down payments.
A 20% down payment can also help protect you from the inevitable declining value of your car. New cars depreciate around 20% or so in the first year, and there is more depreciation each subsequent year.
If you make a small down payment you may find your car loan is “upside down,” meaning the value of your car is less than what you still owe on the loan. If you want to sell the car when you are upside down, you will need extra cash to cover the difference between the sale price and your loan balance.
Also, keep in mind that in the event your car is totaled or stolen, your car insurance will pay you the current depreciated market value of your car, but you are still responsible for paying off whatever balance remains on the car loan.
2. How Big a Down Payment Should I Make on a Used Car?
A car that is at least a year or two old will have already depreciated a lot, so a down payment of around 10% may be enough to make sure you are never upside down.
3. If My Credit Score Is Only Fair or Poor, What Down Payment Should I Make?
With a low credit score, you want to do everything you can to convince the lender that you are a good risk. Making as large as possible down payment can help get the lender to give your application the green light.
4. What Are the Risks of Making a Low Down Payment on a Car Loan?
A low down payment means you will have a bigger loan—potentially more than your car is worth. Because a car is a depreciating asset, you should consider whether you want to borrow so much. Another option is to look for a less expensive car A $2500 down payment is a bigger share of a $20,000 car than a $30,000 car.
A low down payment can also make it more tempting to choose a loan that has a longer term, as a way to make your monthly payment more affordable. The average new car loan is now for nearly 70 months.
If you can pay off your car faster you will save interest over the life of the loan. A larger down payment can make it possible to choose a shorter-term car loan, which can save you money in the long run.