What are the Benefits of Putting a Down Payment on a Car?
Reasons why putting a down payment on your car could save you money
Capital One
Originally published on November 2, 2017
Article QuickTakes:
When you’re in the market to buy a car and you start working the numbers, one of the biggest questions you’re bound to come across is whether or not you should make a down payment on your car. Is it better to put your money in savings and have a higher monthly loan payment, or to put some of that money down and score a lower monthly payment? The answer depends on a few different factors.
The benefits of down payments
Putting money down on a vehicle has plenty of advantages. The larger the down payment, the lower your monthly payment will be—and you’ll probably get a better interest rate, to boot. The general rule is that your payment will drop about $20 a month for every $1,000 you put down, based on a 5% APR, but this is subject to individual situations and loan terms. A larger down payment also helps you build equity faster and protects you and the lender against depreciation and potential loss.
All cars famously depreciate the moment they’re driven off the lot. So what does that really mean? In general, new cars lose anywhere from 20-25% in value after the first year. If you make no, or a very low down payment, and then add in registration fees, sales tax, and other costs, suddenly you owe more than your car is worth. But if you make a larger down payment, all of those extras are offset, your loan stays above water, and you still have equity in the car.
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. Most insurance companies won’t pay you what you owe on the car—they’ll pay you the fair market value of the car. So you’d be out of luck and stuck paying the difference between what they give you and what you owe, which can be a pretty penny.
How much should you put down?
The suggested percentage you should put down when you buy a car can vary. Traditionally experts suggest that you put 20% down when you buy a car, but the average amount fluctuates from year to year. There are a variety of theories as to why the amount has dipped so low, but experts think that it could be attributed to the fact that today people are snagging super low interest rates—in the past, low rates were only given to buyers who made large down payments.
Of course, you don’t want to stretch yourself too thin financially just for the sake of making a larger down payment. If you have a sizeable emergency fund and you’re not strapped for cash, then putting down the recommended 20% could make sense for you. But if you don’t have the extra funds, putting down in the 10-12% range might be a better choice.
Is zero down too good to be true?
Turn on the TV and you’re sure to hear commercials touting “zero down” offers. Sounds great, right? You can nab the car of your dreams and not have to pay a penny upfront. But only those buyers who have stellar credit actually qualify for these offers. And they come with a potential downside, too. Putting nothing down could result in a higher interest rate or potentially leave you upside down on your loan. Zero down isn’t necessarily a bad choice, but you’ll have to be extra diligent in staying on top of any additional costs that are added to the loan. Early diligence is the best way to ward off unwanted financial surprises at the end of your loan.
Overall, how big or small you want your down payment to be is up to you, but like all major decisions involving money, make sure that it makes sense with your individual finances.
