Most car loan providers and dealerships recommend that you make some sort of a down payment when buying a car. A substantial down payment not only helps you qualify for a lower interest rate, but it decreases the overall cost of your loan and prevents you from owing more than your car is worth. Keep reading to discover how much to put down on a car.
How much should I spend on a down payment?
The general rule of thumb is to pay 20% of the car’s purchase price as a down payment.
While most dealerships and car loan lenders don’t require a down payment, experts generally recommend the closer you can get to 20%, the better — but even 10% or less is better than nothing. A larger down payment reduces the amount you owe on your car loan, saving you thousands of dollars on interest in the long run. Having a down payment could even score you a lower interest rate on your loan.
You should be realistic when thinking about how much to put down on a car. Base your decision on your lifestyle and budget — especially if you plan on buying a used car that won’t depreciate as drastically. Look at your savings, the loan interest rate, your credit score and the type of car you’re buying to help inform how much you put down. While 20% is a great goal, even a small down payment is better than none at all.
How can I calculate how much to put down on a car?
Calculate your down payment by taking the price of the car and multiplying it by the percentage you plan on putting down.
For example, say you want to buy a used car for $16,000 with a down payment of 20%.
You’ll multiply the sticker price by 0.2 – the decimal value of 20% – which gives you a total down payment of $3,200 (16,000 × 0.2 = 3,200).
You can then subtract the down payment from the total cost of the car to see how much you need to borrow: $12,800 (16,000 − 3,200 = 12,800).
Finally, you can use our monthly payment calculator below to see how much you’ll pay in interest over the life of the loan based on different rates and terms.
Car loan payment calculator
Calculate how much you could expect to pay each month on your car loan. To see how much you could save with a down payment, put the price of the vehicle minus your down payment in the Loan amount field.
Enter the amount you want to borrow to buy a new car under Loan amount. This might not be the same as the cost of your car if you’re making a down payment.
Write the amount of time you have to pay off your car loan under Loan terms (in years). If your loan term is in months, divide it by 12 first.
Enter the interest rate you expect to pay on a car loan under Interest rate. If your car loan comes with fees, enter the annual percentage rate (APR) instead.
Click Calculate.
In addition to your monthly payment, this calculator shows how much you’d pay on your loan’s principle amount and how much you’d pay overall in interest. The principle amount is the amount that you borrowed and should be equal to your loan amount. Total interest is the amount you would pay on top of the principle — the cost of having your loan.
Can I trade in my old car to help increase my down payment?
Yes. While you’ll still want to save money for a down payment, you can also count your old car’s trade-in value toward your total down payment. So if you saved $1,000 and your old car is worth $1,500, you’ll have a total of $2,500 to use as a down payment.
However, if you’re looking to get the most bang for your buck, you might want to consider selling your car to a private party yourself instead of trading it in at the dealership. Dealerships tend to buy trade-in cars at wholesale value, which is often less than the price you could get from a private buyer.
6 benefits of making a large down payment on your car
From lower interest rates to increased equity, making a larger down payment can help you save in both the short and long term.
1. Lower interest rates
Having a decent-sized down payment can help you snag a lower interest rate for 2 reasons:
You pose less risk to the lender. A down payment shows you’re committed to your purchase and demonstrates your ability to save. Because of this, some lenders may be willing to extend a lower interest rate.
You have to borrow less money. Typically, the smaller your loan amount — the lower your interest rate.
2. Lower monthly payments
When deciding how much to put down on a car, remember that the more money you put down, the less you’ll need to borrow. This not only makes for smaller monthly repayments, but also means you won’t have to pay as much in interest over the life of your loan.
3. Higher chance of loan approval
If you don’t have the best credit, a larger down payment may help you qualify for a car loan. Typically, banks and credit unions want to see that you have around 15% of the car’s value saved up when you have a credit score that just barely meets the minimum requirements.
But you don’t necessarily need it all in cash. Many lenders are willing to count cashback rebates and the trade-in value of your used car toward your total down payment amount.
4. More equity
When you buy any car — new or used — you need to account for depreciation. New cars are especially prone to it, with many losing around 20-30% of their value within the first year of being driven. Since this money is practically lost, having a large down payment ensures you aren’t stuck with a car loan so large that you end up paying more for your vehicle than it’s actually worth.
Used cars have a little more wiggle room. Since they only lose about 10% of their value every year, you may be able to reduce your down payment and still maintain equity. However, because used car loans tend to have higher interest rates than new car loans, you may still want to make as large of a down payment as possible to decrease how much you have to borrow.
5. Avoid becoming upside down on your car loan
Becoming upside down on your car loan means you owe more on the vehicle than it’s worth. Not only will you be paying more on your loan than you’ll be able to sell your car for, but you may also have to roll the remaining amount into a new loan if you decide to buy a different car. This can cause you to become trapped in an endless upside-down car loan cycle.
Having an upside-down car loan is especially dangerous if your car is totaled and you don’t have gap insurance. Without it, you’re responsible for covering the difference between what your insurance company will pay and the outstanding balance on your car loan.
6. Less cost overall
Perhaps the biggest benefit to making a large down payment on a car is the money you’ll save by not taking out a larger loan. Yes, both your interest rate and monthly payments will be lower. But you’ll also owe less overall — putting you in a safer financial position.
You can then take that money you would’ve been paying in interest and put it toward other goals, like paying down debt or investing. If you’re wondering how much to put down on a car, keep in mind that even a few extra hundred dollars will add up to significant savings over the three to six years it takes to pay off your car.
The general rule for how much to put down on a car is 20% of the car’s purchase price. Making a sizable down payment on a new or used car can help you qualify for a lower interest rate, lead to lower monthly repayments and save you a lot of money in the long run. Plus, you avoid running the risk of becoming upside down on your car loan.
Check out these tips for buying a car to learn more about scoring a good deal, getting a pre-purchase vehicle inspection, costs you can expect to pay and how to finance the transaction.
FAQs about how much to put down on a car
It depends on how you plan on financing your car. If you plan on including taxes and fees as part of your loan amount, then you may want to calculate your down payment based on them.
It depends on your lender, though this is best saved as a last resort. Credit cards tend to come with higher interest rates than car loans, so it might be more cost effective for you to simply forego the down payment and take out a larger loan. Learn more in our guide on using a credit card to pay for a vehicle.
Yes, it’s possible to buy a car with no down payment, but it’s not recommended. Even a small down payment will decrease the amount you need to borrow and lower the cost of financing your car overall. When saving up for a down payment, remember that how much you put down on a car will impact the interest rates you qualify for and how much extra you end up paying in interest.
Kellye Guinan is a freelance editor and writer, specializing in consumer lending. Her writing and analysis has been featured on Bankrate, MSN and MediaFeed. She holds degrees in anthropology and German language and literature from Middle Tennessee State University.
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