As a general rule, you should aim to make a down payment of at least 20% on a new car, and at least 10% on a used car, to help you qualify for a better rate and lower monthly payment. That said, the right down payment size depends on your own financial situation, including your credit.
It's almost always better to put 20% down. In the past, one could argue that interest rates being ~3% meant that money was better served being invested, but with 6+% rates, you can't guarantee investments to always beat it.
As a general rule, aim for no less than 20% down, particularly for new cars — and no less than 10% down for used cars — so that you don't end up paying too much in interest and financing costs. Benefits of making a down payment can include a lower monthly payment and less interest paid over the life of the loan.
It's good practice to make a down payment of at least 20% on a new car (10% for used). A larger down payment can also help you nab a better interest rate. But how much a down payment should be for a car isn't black and white. If you can't afford 10% or 20%, the best down payment is the one you can afford.
Upfront savings are appealing when shopping for affordable and reliable transportation. Long-term expenses for potential ongoing repairs can outweigh any initial savings from a low purchase price. Buying a car under $10,000 can be a good option if you keep enough money for breakdowns and maintenance.
Is It Worth Putting a Big Down Payment on a Car? Yes, a larger down payment can help you build equity faster, protect you and the lender against depreciation and potential loss, and improve your chances of approval for a loan.
Financial experts recommend a down payment of at least 20 percent when financing a new or used vehicle. This amount is steep for many, especially with the recent spike in new and used car prices. For example, a 20 percent down payment on a $40,000 vehicle is $8,000.
Upfront Cost: The most obvious downside is the initial out-of-pocket expense. Leasing is often attractive because it requires less money upfront compared to buying. A significant down payment can negate this advantage.
The Car Buying Rule To Follow: The 1/10th Rule
The rule states that you should spend no more than 1/10th your gross annual income on the purchase price of a car. The car can be new or old. It doesn't matter so long as the car costs 10% of your annual gross income or less.
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
Downsides of a 20% Down Payment
Won't provide as much benefit when rates are low: If mortgage rates are low, you could potentially put that money to better use by investing it or paying down high-interest debt. That could be the case even if you have to pay PMI.
According to the 20/10 rule, you should avoid using more than 20% of your annual income toward paying off debt (aside from housing) and avoid spending more than 10% of your monthly take-home income on debt payments. While not for everyone, strategies like the 20/10 rule can help you make and keep a budget.
To apply this rule of thumb, budget for the following: 20% down payment: Aim to make a 20% down payment on your new car. 4-year repayment term: Choose a repayment term of four years or less on your auto loan. 10% transportation costs: Spend less than 10% of your total monthly income on transportation costs.
The rule of thumb is that 20% of a car's value is a good down payment for a new car.
Though you can apply for a loan with a lower credit score, it's a riskier investment for lenders. Because of this, low credit scores often lead to higher interest rates as high as 20%. On average, bad credit gets you an average of 18.77% on a new car loan and 19.02% on a used car loan.
Imagine putting $3,000 down on a car you don't own, it gets stolen and you lose that amount! That's a huge hit, and it's not as uncommon as you think. Another reason to avoid putting any money down is because in most states, you will need to pay taxes on that amount.
You can often secure better rates with a larger down payment, but you also need to understand how much you can afford. Paying too little for your down payment might cost more over time, while paying too much may drain your savings. A lender will look at your down payment and determine which mortgage is best.
On average, a new car buyer with an excellent credit score can secure an average interest rate of 5.25%, but that average jumps to 15.77% for borrowers with poor credit scores. For used car buyers, those averages range from 7.13% to 21.55%, depending on the borrower's credit history.
How much should you put down on a car? One rule of thumb for a down payment on a car is at least 20% of the car's price for new cars and 10% for used — and more if you can afford it. These common recommendations have to do with the car's depreciation and how car loans work.
How much should you put down on a car? A down payment between 10 to 20 percent of the vehicle price is the general recommendation.
In general, you should strive to make a down payment of at least 20% of a new car's purchase price. For used cars, try for at least 10% down. If you can't afford the recommended amount, put down as much as you can without draining your savings or emergency funds.
An increase in your monthly payment will reduce the amount of interest charges you will pay over the repayment period and may even shorten the number of months it will take to pay off the loan.
Lenders often offer better loan terms to borrowers who make larger down payments. This can include lower interest rates, reduced fees, and more favorable repayment terms. A larger down payment can result in a more favorable mortgage agreement and potentially save you money in the long run.
No down payment means a bigger car loan, leading to more interest (unless you pay your car loan off early). You might also need to choose a longer term to keep your monthly payments affordable, which means you'll pay more interest over the life of your loan.