How Much of a Down Payment Should I Put On My Vehicle?

When shopping for a new vehicle, many people keep their eyes on the price of the car, the features, and whether they should buy new or used. However, it’s usually not until they get into a meeting with the finance department that they consider the matter of a down payment. A down payment on a vehicle reduces the amount of interest you pay on your loan as well as your actual monthly payments. In some cases, such as for those with subprime credit, a down payment may actually be required to buy the vehicle. Before you go shopping for a new car, it’s important to think about the down payment and the best course of action once you get ready to sign on the dotted line.

What is the Cost of the Vehicle?

The first thing to take into consideration is the price of the vehicle. Most dealers will determine an optimal down payment by taking a percentage of the total vehicle cost. Though conventional wisdom recommends a 20% down payment (equal to $4,000 on a $20,000 vehicle), the average down payment is now around 10%. In general, the more you plan to spend on a vehicle, the more you should plan to save for a down payment.

How Much Have I Saved?

In many cases, how much you put down on your car has less to do with what you should do and more to do with what you can do. If you need a vehicle immediately, you may have to rely on whatever you have been able to save, even if it’s only 5% (or less). Though you’ll pay more in monthly payments and interest, you may not have a choice in the matter.

What Do I Need to Know if I Put Down Less Than 20%?

There’s a reason why 20% down is a common figure. Your new car will typically lose 20-35% of its value within the first two years of ownership. That means if your car is totaled or stolen, you will owe more on it than what your insurance will pay for it. This is usually referred to as being ‘upside down’ in a loan and its something you want to avoid. If you can only put down 10% or less, you should look at some good GAP (guaranteed auto protection) or new-car replacement insurance

Knowing what you can put down on a car before you go new vehicle shopping is a good way to ensure you have all your bases covered and won’t experience any bad surprises in the dealership’s finance office. If you have more questions about down payments, please reach out to our financing experts.

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