A deposit includes the cash you have on hand, the value of your trade-in, and any discounts you qualify for. All of this works together to reduce the amount you have to borrow. You show lenders that you mean business, which in turn can help you get a better interest rate.
Generally, a 10 percent to 20 percent down payment is best. But if you can afford to deposit more, you can save hundreds of dollars in interest.
4 advantages of a deposit
Down payments are usually a necessity – lenders often want at least a 10 percent down payment. But even if it’s not required, it’s still worth it. After all, it allows you to save money and pay less interest every month.
1. Lower monthly payment
Because depositing money reduces the total amount you have to borrow, you can expect to pay less each month, which means a lower monthly payment.
It’s easy to see the math. Use a car loan calculator to estimate monthly payments. If you borrow $30,000 at 5 percent interest for 48 months, you’re paying $691 a month. A 20 percent down payment of $6,000 reduces the loan amount to just $24,000. And that translates into a monthly payment of $553.
2. More equity at the beginning
Equity is the difference between what you own for a car and its potential selling price. High down payments increase your equity because you don’t have to finance as much through a lender.
Cars are a depreciation good. If your vehicle’s value goes down, you’re more likely to turn your credit upside down — if you owe more than your car’s worth.
A larger down payment protects against loss of value, since the equity acts as a buffer. Because you own more of your car from the start with a higher down payment, you’re less likely to get stuck on a loan that costs more than you could sell your car.
3. Less interest paid
The biggest benefit of a large down payment is that it reduces the amount you have to borrow. If you borrow less, you pay less interest. More money in your pocket – and less in your lender’s – is always a good thing.
Just like the monthly payment example, a 20 percent down payment can make a big difference in the cost of a car loan. If you borrow that same $30,000 at 5 percent interest for 48 months, you pay $3,162 in interest. With a $6,000 down payment, you only pay $2,530 over the life of the loan.
4. Potentially lower rates
Some lenders may be willing to give you a lower interest rate if you make a significant down payment. Because a down payment shows you know how to handle money, you take less risk to the lender.
There are a number of factors that affect your interest rate, such as: B. Creditworthiness and income, so this is far from guaranteed. Still, a large down payment is something lenders consider and can help offset areas where you may not be as strong.
Experts suggest saving at least 20 percent
The most common advice is to put 20 percent or more on a vehicle. More is of course preferable. The less you have to finance, the better.
But it’s a lot of money. In 2021, the average new car price in December was $47,000, according to the Kelley Blue Book (KBB). A 20 percent down payment on that $9,400. Even used cars cost an average of $28,000 — which translates to a 20 percent down payment of $5,600. These are average values, so you’re bound to find cheaper options. Just know that prices continue to rise due to global shortages of important parts like semiconductors.
You certainly don’t want to use up your savings on a down payment. Enjoy discounts when you want to buy a new one and buy your old car at a good price. Selling it or trading it with a dealer can go a long way toward reaching that coveted 20 percent mark.
If you absolutely can’t afford 20 percent, it’s okay to pay only 10 percent. Some merchants operating with bad credit may only ask for a $1,000 deposit. In any case, try to deposit as much as possible to avoid taking out a large loan that could turn you upside down.
Avoid putting anything down
When buying a car, you should always have a down payment. Some experts say it may not be necessary if you’re able to earn 0 percent APR — but most people won’t qualify for it.
Merchants offer zero-down financing because they get the most out of interest. After all, it’s the opposite of a large down payment. Even with low interest rates, you end up having to finance more. That means more interest paid and a higher chance of your loan being turned upside down.
A zero-down offering can also come with a long loan term to offset higher monthly payments. This is the biggest trap. The longer your loan term, the more you pay the lender.
The more you can pay upfront, the better for you. A 20 percent down payment is the guideline, but you can always pay more if you can afford it. Just avoid paying less than 10 percent, or $1,000 — especially if you have bad credit — so you can still lock in a competitive interest rate.
Take the time to compare car loans and find financing before you start buying a car. This way you know exactly how much you can afford and how much you need for a large down payment.