How Much Money Should You Put Down On a Car Loan?

Is a car loan with “zero down” really a good deal? And if not, how much down payment makes sense? There are rules of thumb for typical down payments and options if your personal financial circumstances warrant it.

The Impact of a Down Payment

Your down payment affects a car loan in four important ways:

  • It reduces the total loan balance you owe, and the balance where you will pay interest.
  • At the right amount, it can cover your depreciation and keep you from owing more than your vehicle is worth.
  • It can strengthen your loan-to-value ratio and qualify you for lower interest rates or better terms.
  • You'll also find loans easier to qualify for the large amount you have to put down.

The Typical Down Payment

A down payment of 20 percent is a typical downpayment amount. If you pay tha amount, you are prepaying the vehicle’s depreciation. Unlike a home, which should rise in value over time and build equity for you, a vehicle loses value over time beginning with the moment you drive it off the lot.

Your Circumstances

For some vehicle buyers, a 20 percent down payment is out of reach. Even a modest new car can cost $20,000, which means bringing $4,000 to the closing table, plus licensing and fees that can not be rolled into the car loan.

If that is out of reach, some borrowers put down 5 percent to cover the costs of closing and finance the full amount of the car, if they can handle those monthly payments.

Being ‘Upside Down’

The trouble with putting down such a modest down payment is that the buyer is immediately “upside down” in the car loan. This means you owe more on the vehicle than it is worth, and that is a dangerous position to be in.

If the car is totaled in an accident and an insurance company pays off the current value, it will not cover your loan. You will be in the position of needing a new car and still owing on the previous auto loan. Similarly, if your financial situation changes and you cannot make your monthly payments, selling when you are upside down in a car loan means you lose the car and still owe money on it.

This means that “zero down” sales offers might not be such a good idea. You will have a larger car loan balance on which you are paying interest, and you are upside down in the vehicle as soon as you take possession.

Increasing Your Percent Down

If cash on hand is short, you can effectively increase your down payment by shopping for a less-expensive car. Take the amount of money you have for a down payment and divide it by .08. That simple math will show you what you can afford and still have a 20 percent down payment. For example, if you have $1,500 to put down, divided by .08, you can put 20 percent down on an $18,750 vehicle, not counting fees.

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