• 20 percent for new and 10 percent for used vehicles recommended
• Smaller down payments still offer advantages
Whatever you can afford as a down payment on a car will stand you in good stead, but the general view is that you should aim for 20 percent, or at least 10 percent if buying a used vehicle. One of the main reasons for these figures is to offset the depreciation in a car’s value that inevitably follows a purchase. A down payment offers other advantages, too, including improving the chance of loan approval, a lower APR and smaller payments, so it’s well worth planning what you may be able to pay upfront.
Advantages of making a down payment on car
Increased chance of approval
Putting money down, which can be cash, a trade in or both, shows a prospective lender your commitment to paying off the debt. That can be particularly helpful if you’ve run into credit problems in the past, and have a low credit score. A down payment also reduces a lender’s exposure to a loss if you were to stop making payments and they had to repossess the car.
A lower APR
Paying for a portion of your vehicle straight off the bat lowers the amount you need to finance, and so reduces the ratio of the loan to the value of the car. This often results in a lower interest rate and APR.
Smaller monthly payments
Having achieved a smaller loan amount, and with all other things being equal, your monthly payments will be smaller, too. For example, you have a car for $30,000 in mind and get approved for the full amount at 4.5% APR, over 60 months. The monthly payment works out to be $559. With a 20 percent down payment of $6,000, however, that figure drops to $447.
More equity, less risk
Here’s how a down payment can offset depreciation and reduce your risk of becoming upside down on a loan – when you owe more than the vehicle’s worth. A new car is reckoned to depreciate by 20 to 30 percent in its first year, and continues to decline in value as the years progress. A healthy down payment will immediately reduce your loan amount so it’s more in line with the falling value of your car. Used cars depreciate more slowly, which is partly why a smaller down payment is often sufficient.
Without such measures, slipping into negative equity becomes more likely and, if you wanted to sell the car, you may be faced with rolling over your debt into the loan for your next vehicle.
Another risk with an upside-down loan is that your car is totaled or stolen, and the insurance money doesn’t cover what you owe. Taking out GAP insurance, however, is a way to guard against this.
See what may work, and get a decision on a loan
While 20 percent and 10 percent are suggested for new and used down payments, the average price of vehicles means not everyone can afford those sums. What’s right for you will depend on your own finances, and using auto loan calculators can be a helpful way to arrive at an estimation. Try RoadLoans’ affordability and monthly payment calculators to factor money down into your potential loan costs, and see where you stand.
Some consumers will only be able to stretch to a small down payment or can budget no money down at all. If that’s your situation, you can still apply for financing. As a full-spectrum lender, RoadLoans accepts applications from consumers with a broad range of credit, and has helped customers get on the road with a down payment as low as $500, or even zero money down.