A new car purchase is a huge deal in every household. Next to buying a home, it’s one of the biggest financial commitments anyone will make in their lifetime. Once you’ve got the perfect car picked out and are ready to go forward with the purchase, the next important issue is this: How much down payment is needed for a new car?
Your Down Payment
Everyone seems to have a different idea on this. Some advocate putting down as much as possible and lowering your monthly payment. Some argue it’s best to conserve your cash, get the car and pay it down slowly over the course of four or five years.
Based on experts and experience, a lot can depend on your cash situation and the overall cost of the car. That said, the following offer some of the main strategies in approaching the down payment issue.
The 20 Percent Rule
The truth is that when it comes to car loan down payments, bigger really is better. That’s why shooting for a 20 percent down payment is considered a wise move.
The benefits are many. First, buyers who put down 20 percent of the loan cost will likely get better rates. Loaning agencies feel safer doing this since they are collecting so much of the loan upfront. Also, the monthly payments will be lower and you have less of a chance of getting “upside down” on the loan. In another words, owing more than the car is worth.
That said, it’s important to note that the average buyer does not follow this advice, according to Nerd Wallet. The average down payment for a car in 2014 was about 11 percent of the loan cost.
Or 10 Percent
So while 20 percent is a fantastic number to shoot for, the average buyer doesn’t have it or doesn’t want to spend it. That’s why many places suggest coming up with 10 percent. There’s nothing to feel bad about if this is what you can afford – 10 percent is a significant percentage of the overall loan and can result in many of the benefits listed above at the 20 percent level.
Also, 10 percent is considered a good amount for a used car, which is what many people buy. A quality, dependable used car with low mileage and no bad history can actually make more financial sense than a new car. Lenders typically require a smaller down payment on a used car as it has already depreciated in value.
For those who want to keep most of their cash, they can choose to pay nothing down. These type of deals are offered frequently by dealerships. That said, only a small percentage of people have the credit score to qualify for a zero-down loan. Also, your monthly payment will be much higher, and you will likely want to get short-term insurance to cover the car for the first couple of years. That way, you won’t get upside down on the loan if there is an accident and the car value sinks below what you owe.
Use a Trade In
It’s important to consider all your assets when approaching a car purchase. If you currently have a car and intend to replace it with your purchase, then the amount of trade in for the car is considered as another form of down payment. If you can combine a trade-in with some cash, you can significantly reduce the amount of the overall outstanding loan. In fact, you may find it much easier to hit that 20 percent mark – or even higher.
The key in this area is maintaining the older car. A vehicle that has been properly maintained, driven safely and routinely cleaned and kept nice inside will get a buyer a much better deal when it comes time to negotiate the trade-in value.
Another portion of the down payment can come from dealer incentives. This is especially true for cash rebates, which are deducted right off the top of the purchase price. The key here is to keep an eye out for deals. Combining a cash rebate, trade in and bit of cash is the ultimate way to reduce the amount of your loan.
Those are some of the main options. A combination of them all typically work best for most buyers, while the zero down strategy might work best for those with a high credit score who want to keep their cash.
The key is to research the specifics of the car you want, the offers from the dealership and carefully consider what money you can comfortably commit to a car purchase.
In reality, the amount of a down payment should not be tied to a specific percentage figure, although they give you a goal. Instead, it should be the amount you can afford without hurting your personal finances.