First Car Guide

Especially for teens and other new drivers

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Do I Need a Down Payment? Print E-mail

How much down payment do I need?

 

Until more recent times, it was standard for car dealers and finance companies to require at least 20% down payment on the purchase of a car. It was for a good reason. Because cars depreciate in value from the moment they are driven off a dealer's lot, a down payment helps offset that rapid decrease in value which may keep customers from being "upside down" on their loans, and it protects the loan company or bank because, if they have to repossess the vehicle, they have a smaller risk of losing money.

 

Things are different now

Auto manufacturers and dealers are very competitive and business must be fought for. They are willing to take risks that were unheard of just a few years ago. In many cases, down payments have been reduced or eliminated altogether, primarily for customers with good credit.

 

Even if you have good credit, accepting a "no down payment" deal is not wise. Because your vehicle will depreciate in value faster than your monthly payments pay down your loan, you will be upside down for most of your loan term.

 

So, what is the problem with being upside down?
First, if you decide to sell or trade your vehicle before your loan is paid off, or nearly paid off, you'll get a nasty surprise. You'll find that you still owe more on your loan than your vehicle is worth. Maybe thousands of dollars more.

 

Second, if your car is stolen or totaled in an accident, your insurance pays only what the car is worth, not what you still owe on your loan, which, again, could be thousands of dollars difference. In order to pay off your loan after the accident, you must come up with the extra cash on your own.

 

How much down payment?

A down payment not only helps you avoid the problems of being upside down, but it also serves to lower your monthly payment. The amount by which it reduces your payment depends on the amount of the loan, the amount of the down payment, the length (term) of the loan, and the interest rate. You can use an auto loan calculator to play around with the numbers to find out the effect of different down payment amounts.

 

A good rule of thumb is 20% for a down payment. If you can't do 20% do the best you can.

 

In some cases, especially if you have poor credit, the bank or finance company will dictate how much down payment you must make to get a loan from them. It's usually not negotiable. If it's more than you can pay, try other banks, credit unions, or loan companies.

 

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