Here is a great question that probably doesn’t come up as often as it should: How much money should you put down when you buy a car?
As with most things in the car buying process, the answer is: it depends.
First of all, let’s talk about why it’s a good idea to have a down payment when you buy a car. The answer is pretty simple: to save you money. And there are two ways having a down payment does that.
The first way is that since you don’t have to borrow as much, you don’t have to pay as much in total interest. Here’s an example using our very own car payment calculator (you can use it too!):
Your interest rate will vary based on your credit score but you can see that with no down payment, you’ll be paying $5,172.92 in interest for your car over 5 years.
Consumer Reports recommends putting down at least 10%, and trying for 20%. Let’s see what happens if we split that in the middle and shoot for 15% down:
WOW! With just 15% down, you have already lowered your monthly payment by $62.93 per month and you’re saving over $775.00 during the life of the loan.
Pretty great, huh? But there’s more. Another way having a down payment saves you money is that you could get a lower interest rate. That’s right, lenders like it when you put money down and they reward you with better rates.
Let’s use the same scenario but say that the lender gives you a 2% break on interest because you were ready with your $3,000 down payment:
Boom! You just saved another $982.50! That’s over $1,750 total you’ve saved! Give yourself a pat on the back, and take yourself out for a nice dinner. You deserve it.
Are there any catches here? Well, kind of. Financial experts say you should always have some savings set aside in case of emergencies, like losing a job or medical problems. So if it costs all of your emergency savings to put money down on a car, you might have to think it over.
Also, these numbers generally work well for used car purchases, but what about if you’re buying a new car? Well this is where “it depends” comes in again.
Auto manufacturers sometimes offer really, really low financing incentives, like 2%, 1%, or even 0% interest rates. If you qualify for those rates, you’re probably not going to get a bigger break if you have a down payment, and you’re not always going to save an awful lot of money.