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How Much Money Should You Put Down on a Car

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What is the minimum down payment on a car? In general, you can put down as much cash as you want for a down payment on a car. But that is if you can afford the amount that you want without affecting your finances.

There’s no magic number for how much money you should put down on a new or used car, but there are a few general guidelines that can help you decide how much to put down. For example, when you’re buying a new car, strive to put at least 20% of the total price. For a used car, a 10% downpayment is good enough.

Is it better to make a large downpayment on a car? In general, the more money you can put into a down payment, the better will your financial position be. But make sure you’re not going to compromise your savings or emergency fund.

How does the amount you put into your down payment matter?

The size of your down payment will affect your monthly car payments and the interest rate you’ll pay for the auto loan.

Larger down payment will lower your monthly payments and the total amount of interest associated with car purchases. But it’s important to make sure you’re not depleting your savings account too much.

On the other hand, a smaller down payment will raise your monthly payments and the total amount of interest you’ll pay for the car loan. But it would make sense if you don’t have enough cash saved up to make a larger down payment.

How much should you put down on a car? It depends on your financial situation and what you’re comfortable with.

Why it’s better to put a larger down payment amount

If you’re struggling with the right amount you want to put into a new car, the rule of thumb for a substantial down payment is 20% of the new vehicle’s total price. This is according to a study guide notes for certified public accountants (CPA) written by Bryce Welker, owner of CPA Exam Guy.

Advantages of a bigger down payment

Reduced monthly payments

The amount you finance will be lower, which will result in a lower monthly car payment.

You’ll have more equity

You’ll have more equity in your car if you put more money down, which could be helpful if you need to sell the car or trade-in before the loan is paid off.

Offset initial depreciation

A new car’s value can drop by up to 20% or more as soon as you drive it off the dealer’s lot. The first few years are typically when a vehicle experiences the steepest depreciation.

So if you put down less, you’re likely to owe more than what your car is worth (upside down on your loan). A bigger downpayment can help offset the initial depreciation and put you in a better position when it comes time to trade in or sell your car.

Get better interest rates

The more money you put down, the lesser risk is for the lender. What does that mean? Lower risk means lower rates.

Likewise, this will help you significantly if you’re aiming to score a 0% financing as this is only offered to a customer with a good credit score. A larger downpayment is the best way to qualify for this kind of deal. If you have a low credit score, it’s best to build a good reputation with the lender first if you’re planning for a car loan.

Easy approval

A bigger down payment makes it possible to get you approved quicker just like being offered a lower interest rate according to Logan Murray, a financial planner at Pocket Project. A higher downpayment will not just lead to easier and quicker approval but you could even get offered the best deals.

Reduce loan-to-value ratio

Car loans depend greatly on the car’s purchase price. This is why lenders put a limit on the car buyer with regards to how much they are allowed for a car loan.

This is called LTV or loan-to-value ratio. Every car dealership has its own LTV policy with its loan approval. For this reason, a bigger down payment can help you qualify with the car dealership’s LTV requirement.

Should I choose the zero-down payment?

Car dealerships will always bring buyers in. That means they would go as far as using the zero-down payments scheme. However, only choose this route if you’re purchasing the car with cash outright.

Likewise, this is also a good option if the dealer doesn’t offer 0% financing. This will help you save money from interest-earning options when making payments on the vehicle. While this will help you earn interest on your money, make sure you leave the money you saved for the car.

Down payment or Auto Loans Extension

Car dealers will always have another alternative if you can’t afford the average down payment. For this reason, we highly recommend never to settle for an extended-term. In perspective, a car dealership will offer an extension of your term by a few more years.

While this option will significantly lower your monthly car loan payment, you need to consider the hefty amount of cash lost because of additional interests and other finance charges.

Some offers could go as much as 84 to 90 months for a zero-down payment option. Avoid falling for this scheme otherwise, your finances will suffer.

Why do most people fear putting a substantial down payment?

Most people believe car dealers will steal their money away if they put down a larger down payment amount. Here’s our advice. Make sure to keep track of your down payment. That’s it!

Never tell a car salesman about the down payment you’re planning to make before you agree to the car purchase price. If they ask about the down payment, tell them you don’t have the amount at the moment.

Why does a salesman want to know if you have a down payment? This will help the sales manager control the numbers to favor the car dealership.

What to do if a salesman offers confusing presentations

Salesmen would often introduce confusing presentations like the “four-square” technique among others. The best way to get out of this situation is to tell them directly that you only want to know the lowest selling price of the car.

You also want to tell them that you don’t want to know about the payments. Moreover, only speak about the down payment amounts once you know the new car purchase price.

Make sure that your down payment is subtracted from the purchase price along with other fees like title, tax, license, etc.

Keep in mind that there are unethical car dealers who will steal money from you. They will always try to manipulate the figures in the transaction.

In Conclusion

All in all, the rule of thumb for a car down payment is the bigger the better. However, if you don’t have enough cash, taking the 20% down payment for a new vehicle and a 10% down payment for used cars remains a significantly good number. Do you want to get an idea about a car down payment? Try a car down payment calculator. This will help you decide how much to put up with the car down payment without affecting your finances.

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