Cars Plan
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Cars Plan

How Much Should You Put Down on A Car?

When buying a car, one of the things to which you must pay attention is the amount of down payment you ought to pay. Usually, the down payment is a percentage of the total selling price of the vehicle. So, how much should you put down on a car? When buying a new car, expect to pay at least 20% of the vehicle’s price. However, a minimum 10% down payment is suitable for a used car.

The down payment size affects aspects of your car loan, such as repayment term, interest rate, and monthly payment amounts. There are several ways of making a down payment on a car, including cash, the value of a trade-in car, or a combination of the two. Remember that your credit score also plays a role in determining how much you should put down on a car.

How Much Should You Put Down on A Car

How Should Big Be the Down Payment on a Car?

No two situations can be the same when it comes to how much down payment you can make on a car. Some of the biggest determinants on how much you should put down include buying a new or used car.

1) New Vehicle Down Payment

How much should you put down on a car? Conventionally, dealerships require buyers to make at least 20% in down payment. While that seems like a lot, it is the best thing you can do for yourself and your finances. Making a down payment of more than 20% on a car comes with several benefits.

If you can make at least 20% of the purchase price in down payment, the dealership will likely lower the interest rate, extend better repayments terms, and reduce the monthly payment amount. That means that you’ll end up paying much less for the car than if you had not made any down payment or paid less than 20%.

Still, you can shield yourself against depreciation by putting down more than 20% of a vehicle’s purchase price. Remember, a new car can reduce its value drastically quickly. The more you use it, the lower its value becomes. The progressive reduction in a vehicle’s value is called depreciation. A larger down payment means you owe less than the vehicle’s worth.

With a down payment of less than 20%, you owe more than the vehicle’s actual value. That isn’t a big issue, especially if you intend to make monthly payments to the end of the loan term. However, if you intend to sell the vehicle mid-term, you’ll end up having to bridge the difference between the loan balance and the sale price.

Besides, your car could get stolen or totaled long before you complete all the monthly payments. If you have an “actual cash value” insurance coverage, the insurance company can only pay the depreciated market value and nothing more. You would have to top up the auto loan balance out of pocket with that. With a “replacement cost” insurance coverage, the insurance company pays more when your car gets totaled.

2) Used Car Down Payment

If you need financing for a used car, you need to put down at least 10% on the purchase price. With that, you can prevent ending up upside down of the loan. The reason for the lower down payment is that a used car would already have a much-depreciated value.

Benefits of Putting Down More Money

Whether you’re buying a new or used car, putting down more money can have several advantages to you as the car buyer. The benefits of higher down payment include the following:

  • Lower Monthly Payments: A larger down payment drastically reduces the size of your loan since you have chopped a large portion of it.
  • Shorter Loan Term: After making a larger down payment, the loan term can get reduced. For example, the dealership could reduce a 60-month loan term to 48 months.
  • Reduced Interest: Making a larger down payment may help you get reduced interest on your car loan. That essentially translates to fewer monthly payment amounts.
  • Improved Chances of Approval: For buyers with a poor credit rating, putting down a substantial amount improves their chances of qualifying for financing.

How Much Can I Put Down on a Car with Bad Credit?

A low credit rating puts you at a disadvantage when qualifying for car financing. It, therefore, becomes necessary to put down much more cash on the car. That not only reduces how much you can borrow but also increases your chances of qualifying for a loan. The reason for that is how it reduces the lender’s risk. No matter how tattered your credit rating is, the lender will likely approve you for financing.

Frequently Asked Questions (FAQ)

Is it better to put down payment on a car?

Yes. Putting money down on a car lowers your monthly payment amounts and qualifies you for better interest. You can easily and quickly build equity with a large down payment, protecting you against potential loss and depreciation.

How much should you put down on a 20k car?

A $20,000 new car requires you to put down at least 20% of the purchase price. That means that you’ll end up paying $4,000 or more. With that, you can avoid getting upside down on a car loan.

How much should a car down payment be?

A car down payment depends on many factors, including whether the vehicle is new or old. A down payment of at least 20% is good enough for new cars. If you want to buy a used car, 10% or more is good enough.

The Bottom Line

How much down payment should you put down on a car? For a new car, 20% or more would do while 10% or more is sufficient for a used car. Putting down more money has several advantages, including reduced interest rates, lower monthly payment amounts, and reduced loan terms. Therefore, it is important to save a substantially high amount of money. If you have poor credit, the down payment could even result in a loan approval.

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