Buying a car is a significant financial decision, and one of the key questions you’ll face is how much to put down as a down payment. While there’s no one-size-fits-all answer, there are several factors to consider to make an informed choice
The 20/4/10 Rule: A Guiding Light
The 20/4/10 rule offers a helpful framework for determining an appropriate down payment. It suggests putting down 20% of the car’s price choosing a loan term of four years or less, and keeping your total transportation costs (including car payment insurance, gas, etc.) below 10% of your monthly income.
The Importance of a Down Payment
While tempting, opting for “zero money down” may not be the wisest choice. A down payment offers several advantages:
- Reduces Lender Risk: A down payment demonstrates your commitment and reduces the lender’s risk. This can lead to easier loan approvals, lower interest rates, and lower monthly payments.
- Minimizes the Chance of Being Upside Down: When you owe more on your car than its worth, you’re in an “upside-down” situation. This can make it difficult to sell your car without incurring a financial loss. A down payment helps mitigate this risk.
Calculating Your Down Payment
Determining the right down payment amount requires some simple math. Start by figuring out how much you can comfortably afford to put down. Next, in order to obtain an estimate of your possible APR and loan terms, prequalify for a few auto loans. Make various monthly payment scenarios with different down payment amounts using this information.
Boosting Your Down Payment
There are ways to increase your down payment without breaking the bank:
- Trade-in Your Current Vehicle: Get the most out of your trade-in by researching its fair market value and considering selling it privately for a potentially higher price.
- Look for Rebates: Manufacturers often offer rebates for specific groups like first responders, military members, and recent graduates. These can be applied towards your down payment.
- Shop During Promotional Events: Keep an eye out for special promotions offering 0% APR or zero down payment options with favorable terms.
Can You Buy a Car with No Down Payment?
While it’s possible to buy a car with no down payment, it’s generally not advisable. These loans often come with high interest rates, increasing the overall cost of the car. Additionally, you’re more likely to end up upside down on the loan.
Remember, the best down payment is the one that fits your budget and financial goals. Consider your long-term financial health and choose an amount that allows you to comfortably manage your car payments while avoiding unnecessary debt.
The benefits of down payments
Putting money down on a vehicle has plenty of advantages. Your monthly payment will be lower the more down payment you make, and you’ll probably also get a better interest rate. The general rule is that your payment will decrease by approximately $20 per month for every $1,000 you put down, depending on an annual percentage rate (APR); however, this is subject to specific circumstances and loan terms. In addition to accelerating the process of building equity, a bigger down payment shields both you and the lender from potential loss and depreciation.
All cars famously depreciate the moment they’re driven off the lot. What does that actually mean? Generally speaking, new cars lose anywhere from 2020 to 25% of their value after the first year. You may find yourself in debt more than your car is worth if you make no down payment or a very small down payment and then incur additional expenses like sales tax and registration fees. However, if you put down a bigger amount, all of those extras are covered, your loan remains in good standing, and you retain ownership of the vehicle.
Having equity in your car may give you flexibility. Take this scenario as an example. Say you buy a sweet car but put no money down. Six months later your car is totaled, but you haven’t built up any equity yet. The majority of insurance companies will only pay you the car’s fair market value rather than what you owe on it. As a result, you would be stuck paying the difference—which can be quite a bit—between what they give you and what you owe.
Reasons why putting a down payment on your car could save you money
Originally published on November 2, 2017
Article QuickTakes:
One of the most important questions you’ll undoubtedly have when you start crunching the numbers and shopping for a car is whether or not you should put down payment on your purchase. Depending on a number of variables, it may be preferable to save more money and have a higher monthly loan payment or to put some of that money down and have a lower monthly payment.
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FAQ
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