The ideal down payment for a car loan often comes down to what you can afford. In general, the more you can put down, the better. A higher down payment could mean lower monthly payments and interest rates.
But how can you know how big the down payment on your car loan should be? Read on to learn more.
What Is a Down Payment?
A down payment for a car loan is the amount of money you have set aside toward the full purchase price of the car you want to buy.
For example, If the car costs $25,000 and you have $5,000 in your savings account, then you could make a down payment of 20% and borrow the rest from a lender, such as AFFCU or other financial institution.
Note that if $5,000 is your entire savings, then you probably don’t want to use it all on your car payment. Be sure to keep some aside for expenses and emergencies.
Down Payment and Monthly Payment
Your down payment for a car loan has an impact on the amount you pay each month. A bigger down payment will mean you’re borrowing less, so your monthly payment will be lower than if you had borrowed more money for the same amount of time.
To figure out your monthly payment based on your down payment for a car loan, check out our auto loan calculator. By entering the purchase price of your car and down payment amount, the calculator will estimate your monthly payment using your likely interest rate and dividing by the term of the loan.
Impact of Down Payment on Interest Rates
If you make a bigger down payment for a car loan, you’ll likely be offered lower interest rates. When thinking about interest, it’s useful to think about both the annual percentage rate (APR) and the total interest you’ll end up paying.
When you shop around for a car loan, you’ll see different lenders offering different rates. The APR usually includes the interest rate plus any other fees bundled into one percentage.
Your credit score will affect what interest rate you’re offered. The better your score, the lower your interest rate. If your credit score needs some work, you could try to build your credit before you apply for a car loan.
The total interest means the dollar amount you end up paying over the life of the loan. A longer loan term means a lower monthly payment. But it means you’re paying interest for a longer period and so your loan will end up costing you more overall.
Down Payment and Loan Term
This is a question of logic rather than math. If you borrow more money, you’ll probably need longer to pay it off so your monthly payments are affordable. If you borrow a smaller amount of money, you may be able to pay it off sooner.
But when considering your down payment for a car loan, nothing is stopping you from putting a large amount down and choosing the longest possible term, too!
Just be sure to work out how much total interest you’ll pay for the term you choose.
New vs. Used Cars
The amount of your down payment for a car loan may also depend on whether you’re buying a new or used car.
Down Payment on a New Car
It’s a good idea to put down at least 20% when purchasing a new car because new cars depreciate about 20% to 30% in the first year. So, if your down payment is too low, you may owe more than the market value of your car.
This is called an upside-down or underwater loan and it can be a problem if the car is written off or stolen because insurance will cover only the actual cash value. In that case, you would have to pay the difference unless you have GAP insurance.
Down Payment on A Used Car
A down payment of just 10% could be acceptable on a used car because it has already depreciated since the original owner drove it off the lot. Depreciation could be 15% to 18% from years two to six, then it will slow down even more.
Read More: What You Need to Know When Buying a Used Car
Choosing Your Down Payment for a Car Loan
The best way to decide on your down payment for a car loan is to start with looking at what savings you have then figure out what portion of that you’re willing to spend. Take into consideration interest rates, loan term, monthly payment amount, and condition of the car.
Once you’re ready, it’s a great idea to get your loan pre-approved before you head to the dealership. It will mean you get the most competitive rates and can focus on your car-buying experience.