What’s the right down payment on a car?
A down payment is any money you pay upfront when you buy something on credit, like a house or a car. How much cash you should put down depends on your budget, but we have some tips to help you decide.
Why is a down payment important?
Making a down payment when you buy a car shows lenders you’re serious about repaying your car loan. Lenders want to make sure you’re going to pay back what you owe. If you have more of a stake in the car (known as “equity”), the lender assumes you’re more likely to make your car loan payments.
Equity means the value of an asset (like your car), minus any debts or liabilities you owe on that asset (like your car loan).
The lower your down payment, the more likely you are to have negative equity in your car. Negative equity (aka being upside-down or underwater) means you owe more on your loan than your car is worth. Lenders worry about negative equity because if they have to repossess the vehicle, they won’t be able to sell it to cover the amount they’ve loaned out.
The bottom-line: the more money you can put down, the more likely you are to be approved for a car loan, and the better rates you’ll be able to get on your loan.
A bigger down payment also means you’re borrowing less, which means you’ll pay less in interest over the loan term.
How Big Should My Down Payment Be?
The standard recommendation for a car purchase is to put 20% of the price down. For the average new car price of $32,000, 20% is $6,400. So if you follow the expert guidelines, you’d pay $6,400 in cash and take out a loan for $25,600 (or a little more for fees and any ancillary products like a Vehicle Service Contract you want to add).
What if you can’t afford to pay 20% upfront? Don’t stress too much. A study from 2017 found that the average down payment was closer to 12%. Your best bet is to pay as much down as you can afford, keeping in mind your other financial goals.
Lower Credit Score, Higher Down Payment?
For borrowers with less-than-perfect credit, down payments are especially important. That’s because lenders are more worried about the risk of nonpayment by borrowers with “subprime” or “nonprime” credit. In addition to trying to improve your credit score before going car shopping , we recommend saving up for a larger down payment if your credit score is below 600.
Does My Trade In Count Toward My Down Payment?
The value of any vehicle you trade in does count toward your down payment. That means if you have equity in your vehicle, you can count it toward the 20%.
If you have a vehicle to trade-in, we recommend checking out Carvana’s instant cash offer. Carvana will give you a firm price for your vehicle, then come to your home to pick it up!
