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How Much Should I Put Down on a Car Loan?

Jul 14, 2016

If you are planning to finance the purchase of a new or used car, you are going to need to decide how much money to put down. Putting money down on a loan has several advantages, the most obvious of which is that the more you put down upfront, the less money you have to borrow, which lowers your monthly payment.

There is another important way that putting money down can lower your payment: it can actually get you better interest rates from the bank. Lenders base the interest rate of the loan on the perceived risk of the loan. Someone who put $2,000 down on a loan is seen as being less likely to default on the loan than someone who puts no money down, and therefore may receive a lower rate on the loan than someone who puts no money down. A lower rate coupled with a smaller loan can knock some serious money off you monthly car payment!

Putting money down on your loan has the added advantage of helping to protect you from being “underwater.” A vehicle is considered “underwater” when the amount owed is greater than the value of the car. Vehicles depreciate in value over time, but they depreciate at a faster rate during the first year. New vehicles, in particular, depreciate as soon as they drive off the lot for the first time and are no longer “new.” Putting money down, helps to offset this depreciation, as it keeps the size of the loan smaller relative to the value of the vehicle.

How much should you put down? It is entirely up to you. You do not have to put any money down; it is just advantageous to do so. Traditionally, a 20% down payment was considered standard, although Edmunds.com reports that the average down payment these days is closer to 10%. Again, the more you put down, the smaller the loan, the lower the payment, and the better the rate. If you cannot afford to put money down but you are concerned about owing more than your car is worth in the event that your vehicle is totaled, we offer a product called “GAP insurance” that will cover the difference. One of our financial services managers would be delighted to tell you more about this product if you have any questions.