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Best Percent To Put Down On A Car

author
Maria Garcia
• Sunday, 29 November, 2020
• 7 min read

Two popular options for acquiring a car without the cash to buy it are a loan and a lease. For example, if you make a 20 percent down payment rather than a 5 percent down payment, you’ve offset more of the depreciation hit, you’ve lowered your monthly payment, and you can probably afford to have a shorter term on your loan meaning you’ll own your car sooner, and you’ll pay less in interest no matter what rate you negotiated.

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Contents

For example, a well-qualified lessee could lease a 2020 Toyota RAV4 LE with no money down and make a $320 monthly payment, or you could lease that exact same car for the same amount of time for $239 per month if you make a down payment of $2,699. Those are pretty significant monthly savings as a reward for scraping up some cash for a down payment.

A good rule of thumb for a down payment on a car loan is 20 percent of the purchase price. For new car leases, the required initial payment, or cash due at signing, is typically predetermined.

There isn usually’t a lot of flexibility on how much cash you can put down on a lease, so it’s a good idea to go with the aforementioned predetermined amounts. For the reasons we mentioned before, it’s still a good idea to pay as little up front as possible while keeping the monthly payment affordable given your income.

To get an idea of the value of your trade-in, check out Kelley Blue Book to get an estimate on the trade-in value of your specific car. Otherwise, you can get an instant cash offer, so you can know right away exactly how much fuel you can add to your down payment with your existing car.

Keep in mind, that little of extra cash you get from selling the car yourself isn’t free. You will have to spend time and maybe a little of your own money preparing and selling your car.

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Dealers and automakers often offer rebates when you finance a new vehicle through the financial arm of the brand you’re buying from. Bottom line Financing a new or used car with an auto loan with a reasonable interest rate is a good way to get safe and reliable modern transportation without having to squirrel away money for years in preparation.

A new car lease typically requires less cash down and lower monthly payments than a loan for the same vehicle. Know the fair market value of the car you have your eye on, the value of any rebates or trade-ins, and how much cash you can afford to put down.

From there, you can ask for a quote on a lease or loan or seek financing from an outside institution, so you can get the keys to your new ride. For used cars, 10 percent is typically the minimum amount required by the lender for a car down payment.

The reason for this is you’ll signal to the lender that you have the capital and thus can be counted on to pay off your debt as promised. By positioning yourself as a responsible borrower, lenders will be more inclined to offer you a lower interest rate on your car loan.

This is good for you because it means you’ll be spending less money overall on your car purchase. That being said, if you have a healthy down payment, lenders will be more apt to approve you for a loan (even if your credit score is less than perfect).

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Car payments can be a burden if they’re eating up a big chunk of your income every month. Let’s say you bought a new car for $16,000, with an annual interest rate of 5 percent for a 36-month term.

So much so that it may be worth your while to save up a bit longer to have a bigger down payment to play with. A simple way to do that is to lower the amount you need financed on the car by providing a bigger down payment.

But one thing is nagging you: What is the right amount of money to put down as a down payment if you decide to buy or lease that vehicle? One of the key functions of a down payment is to help protect the finance company.

But unless you’re simply doing it for the airline miles and paying it off immediately, for instance, financing any portion of a car purchase with a credit card is generally an unwise financial move. When financing a car, a larger than average down payment can indeed save you some money in interest charges.

But don’t dig into the emergency fund, for instance, to increase your down payment. Rod Griffin, director of consumer education and awareness at Experian, a consumer credit reporting agency, said you have to look at your overall financial situation to determine the down payment if you plan to purchase a vehicle.

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The consumer can’t just dive in and use every nickel remaining each month for that car payment. Griffin said that months in advance, “you have to look at setting aside money specifically for that down payment.

Not that many years ago a 20 percent down payment typically was required to purchase a new or used car if a loan was planned. The purchase price is the cost of the vehicle, plus taxes, registration fees, and any other costs/fees that are required.

Subtracted from the purchase cost is any rebate offered by the automaker, a trade-in (if applicable) and any money the buyer adds to the deal to lower his loan obligation, which combined make up the down payment. Sometimes a buyer may want to boost his down payment by adding several thousand dollars to the deal to reduce his loan obligation.

In recent years, the required down payment for a new or used vehicle has dropped to 9 to 12 percent. Credit scores on average are at a record high which indicates that people are managing their debt obligations as well as or better than they ever have,” Griffin said.

However, if the buyer’s “credit score is not particularly strong, you may be required to make a larger down payment. So, having a strong credit score will help you qualify for a larger car loan with less down payment,” he said.

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While providing the largest down payment a person can afford is recommended for purchasing a car or truck, it is a completely different story for a lease vehicle. A consumer should not provide a dollar more than what the dealer requires to lease that vehicle.

So, a parent comes to the rescue, adds $4,000 to the lease deal, making the total down payment $6,500. If the leased crossover is covered by GAP (Guaranteed Asset Protection) insurance and the lessee’s insurance, GAP will cover the difference between the cash value of a vehicle and the balance owed on the lease.

Accept the higher monthly payment because if the car totaled or stolen the insurance company (and GAP) will make you whole. Conventional wisdom has long held that 20% is the magic down payment number when applying for an auto loan.

Few people qualify for zero percent APR, but it is the ideal way to finance a car. If you have poor credit, a substantial down payment could increase your chances of getting approved for a loan.

The explanation for the prevalence of small down payments is simple: It's all people can afford. “The main reason why people aren't putting enough down is because the cost of the vehicle has substantially increased, but people's income has remained relatively flat,” says Jack Willis, executive director of public affairs for the Consumer Federation of America.

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In other words, if you wanted to put 20% down on an average new-vehicle purchase today, you'd have to come up with approximately $7,255. Either way, if you only put down a small amount of money, you'll have negative equity in the car, meaning you'll owe more on it than it's worth.

Here's what we mean: If your new car is totaled or stolen in the first couple of years, that average down payment won't provide enough equity to cover the balance of the loan, which is why you need gap insurance or new- car replacement insurance. One thing to note about gap insurance is that it does not cover you if you're simply tired of the vehicle and want to trade it in or sell it.

New- car reimbursement coverage is available from a number of insurance companies, including Farmers, Liberty Mutual, Travelers, Allstate, and Amiga. If your car is totaled or stolen within the first or second year of ownership, the insurance company will pay the full cost of having it replaced.

For example, Farmers Insurance said its customers pay an additional 4-6% of their comprehensive and collision premium for new- car replacement coverage. The company also offers gap insurance on a state-by-state basis, for approximately 7% of the customer's comprehensive and collision premium.

These prices may vary based on the driver and other factors, a Farmers' spokesperson said. Edmund's data shows that the average used- car down payment is about 10.9% of the selling price.

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This amount should be adequate for a used- car purchase from a private party since the prices are lower and the depreciation is slower. If you've opted to buy from a dealership, however, make sure that you negotiate to minimize the effect on its depreciation.

If you want to go the zero- down route, we highly recommend gap or new- car replacement insurance. If your budget can accommodate it, a bigger down payment will allow you to choose a shorter finance term, which will save you money in interest charges.

It will also cover most of the first-year depreciation and give you enough equity so that you don't have to come up with additional money if you decide to buy a different car before you pay off the loan. But if you have a FICO score of about 620 or below, making a bigger down payment could increase the chances of being approved for a loan.

Lenders want to lower their risk of not being paid, so they prefer loans of smaller amounts. If you're a buyer with a low credit score, you also should resist the allure of longer-term loans, even though they offer more palatable payments.

Edmund's data shows that the average term of a loan has increased to 69 months: nearly six years. Take a look at your budget and see what percentage of the car's purchase price works best for you as a down payment.

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If depreciation put you at financial risk in the event of an accident, pencil out the cost of gap or new- car replacement coverage.

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