Pondering how much to put down?
Many people may believe that a typical down payment for a car is 20%... but, that is a very high number in today’s world. And while there isn’t really a universally recommended amount for a down payment on a car, it is almost always a good idea to put a down payment on the car you are buying, if you can afford to do so. In fact, depending on your credit situation, many lenders and/or dealers may require it. That said, it turns out that people are dedicating less and less money to their down payment – which can cost you in the long run.
The main reason people provide less for a down payment is to reduce their out-of-pocket costs. It’s true that, psychologically, $2,000 “up front” feels like significantly more money than that $2,000 being broken up, and spread across the next 48, 60, or even 72 months. But, with interest, that $2,000 dollars could cost you a lot more over the life of the loan.
How much should I provide as a down payment on a car?
Today, the average vehicle down payment is only about 5% of the price of the car. So, if someone wants to buy a $25,000 car, and he choses the “typical” down payment, he will be putting down about $1,250. If he chooses 20%—the amount that many experts recommend—he would be putting down $5,000. But, how much you should be providing as a down payment on a car will be based on your unique situation. Before you decide what amount is right for you, consider going through these few steps:
- Request copies of your credit report from the three credit bureaus—Experian, TransUnion, and Equifax. Each of these bureaus has their own way of calculating your credit worthiness, so they won’t be exactly the same. Once you receive your reports, you should check for accuracy. If there are any mistakes on your credit reports, you could receive an auto loan offer with terms that you don’t necessarily deserve. If you have bad credit, you should plan on providing a relatively higher down payment so that you may get a better loan offer (or be prepared for a high interest rate). By giving a down payment, you demonstrate to your lender that you are willing to risk some of your own money – and that you are probably more committed to repaying the loan. The result is that they may be more willing to give you better (or more typical) car loan terms—even though you have less-than-perfect-credit.
- Know what you want to buy before you step on the lot. It is important to compare the cars that interest you, on your own time, so that you aren’t as easily swayed by a convincing salesperson. Providing a small down payment, or none at all on a new or used car, could put you immediately into an “upside down” situation on your loan, which means that you owe more on your car than the car is actually worth.
- Be honest with yourself on a down payment you can afford. The more money that you are willing to put down on your car, the more your lender and/or dealer may be willing to work with you on the price of the car and the interest rate. As long as you have something to offer the organization that is loaning you money, you may have a bit more negotiating power.
- Research which dealerships are offering specials rates or deals on vehicles you may be interested in. Many times, these deals are reserved for new cars, and for people with good credit. But, dealerships need to sell cars, and if they need to sell a certain amount of a particular model quickly – or if they have more inventory than they want… you could end up with a deal.
- Compare offers from competing lenders and/or dealers. All too often, people go to just one dealer (or lender) when they are shopping for a car or looking for financing. That may not be in your best interest. Comparing offers can provide you with a great opportunity to create competition and get a good deal. You might feel that it is a waste of time – but a lower interest rate and/or a lower price on the vehicle you want could make it all worth the effort!
The benefits of a higher down payment...
Typically, an interest rate is determined by both fluctuations in the market and on an individual’s credit situation. If you haven’t been very reliable in paying back previous loans… then your credit score will be negatively impacted. And with a low credit score, a high interest rate is sure to follow. Having a down payment, however, even with a low credit score, will oftentimes enable you to receive a lower interest rate. Though there is no answer for what a typical down payment on a car for a person with bad credit is… it’s very possible that a reasonable down payment will have a positive impact on your potential interest rate.
With a higher down payment, you will end up paying less in interest simply because your loan amount is lower. The higher your loan amount, the more you will pay in interest over time.
You are less likely to be “upside down” on your loan (meaning you owe more on your car than its worth) if you put some money into the car right away. With depreciation and long-term loans, more and more people are upside down on their loans. This often means that they actually end up owing money when they sell their car or trade it in on another car in the future.
More is better.
Though there is no typical car down payment, a good rule of thumb could be that more is usually better. But finding the right lender or dealer is also extremely important in obtaining a good deal. If you need help finding lenders and dealers in your area, let Car.com help you. Our free, no obligation service will connect you with a lender and/or dealer who wants to earn your business. Plus our service is totally free to you and you are under no obligation whatsoever to work with any lender and/or dealer we connect you with.