Confused about how you want to spend your tax refund money? If you’re planning to scoop up a new or pre-owned vehicle, you might want to think about how much money you should put toward your down payment.
The general view is that you should aim for 20% of the sales price, or at least 10% if you’re buying a used vehicle. The main driver for these figures is to offset the loss of value that follows a vehicle purchase and it reduces your financed amount.
A down payment offers other advantages, including improving your chance of an approval, a lower APR and smaller payments. It’s well worth planning what you may be able to pay upfront.
Advantages of making a down payment on car
A lower APR
Paying for part of your vehicle up front lowers the amount you need to finance, and your lender may look at the loan differently. With a down payment, you have some investment in the vehicle. This can result in a lower interest rate and APR.
Smaller monthly payments
Having a smaller loan amount means your monthly payments will be smaller, too. For example, you have a car for $30,000 in mind and get approved for the full amount at 4.5% APR, over 60 months. The monthly payment works out to be $559. With a 20% down payment of $6,000, the payment drops to $447.
More equity, less risk
Here’s how a down payment can help prevent you from being upside down on a loan – when you owe more than the vehicle’s worth. A new car usually loses 20-30% of its value in its first year and it continues to lose value as it ages. A down payment will immediately reduce your loan amount so it’s more in line with the value your vehicle will lose. Used cars lose value more slowly, which is partly why a smaller down payment often works.
Without a down payment, slipping into negative equity becomes more likely. If you wanted to sell the car, you may be faced with rolling over your debt into the loan for your next vehicle.
If you’re upside-down on a loan and your car is totaled or stolen, your insurance company may not cover everything you owe.
See what may work by getting pre-qualified
While 20% and 10% are suggested for new and used down payments, the average price of vehicles means not everyone can afford that much. What’s right for you will depend on your own finances.
Some consumers will only be able to stretch to a small down payment or can budget no money down at all. If that’s your situation, you can still get pre-qualified for financing. We have a large range of credit situations and can help customers get on the road with a down payment as low as $500, or even zero money down.
Wherever you are in the credit spectrum, explore our options and pre-qualify for a loan online. Then try our Budget Customizer after you get pre-qualified to get a better picture of the payment you could expect with your down payment.
