What Is Considered A Good Down Payment On A New Car?

Not all car buyers prefer to make a cash purchase. In fact, the total auto loan debt in the U.S. by the end of 2019 was $1.2 trillion. The average monthly loan repayment is around $550 for new vehicles and around $393 for used cars.  

Monthly repayments can vary depending on the amount of down payment you make when financing the car. Read on to learn what the optimal amount is to pay upfront for a vehicle. 

Why You Should Put A Large Down Payment On Your Car Loan

If you’re buying the car with the help of a loan, it’s highly recommended that you invest in giving a large down payment. Therefore, try to put as much money down as possible on your car loan. There are a number of reasons for this:

• Lesser tenure: If you make a large payment upfront on your auto loan, you can repay the entire loan amount within a much lesser time period
• Better rate of interest: Some note that when you have paid a higher payment upfront on your loan, there’s a higher chance that you’ll get better rates of interest, thus lowering your monthly payments
• Avoid depreciation: When you have paid a high down payment on your car loan, you’ll have higher equity. This directly diminishes any chances of going upside-down on the loan

What Is The Right Amount For Down Payment?

If you’re getting a vehicle via a lease, the required down payment amount is usually fixed by the dealer. However, in the case of an auto loan, you can pay an amount upfront depending upon your affordability. The sum you pay directly impacts the rates and repayment terms that’ll be offered to you.

So, how much should your car down payment be? On average, making a payment of at least 20% of the car’s overall cost is a smart move. It’s even better if you can pay more than this. 

At times, the sum owed on the loan could become higher than the depreciated value of the car. If you don’t wish to take this risk, one of the best ways is to make a higher payment upfront on the car loan. You can also add up some amount from time to time to this payment so that you can avoid the risk of facing the vehicle’s depreciated value.

How To Add Funds To The Down Payment?

It isn’t always necessary to make this payment using cash. In such a situation, you can try other modes such as a trade-in. If you’re buying a new vehicle and you already have an old car at home, you can trade-in the old one to use as a down payment for the new one. 

Before doing so, check the market price of the older car. You may be able to get a much higher price for it somewhere else compared to what the dealer is offering you. In such a case, you can sell off the old car on your own. You can then pay the dealer cash as an upfront payment using the funds that you made selling your previous vehicle.

How To Determine The Right Down Payment Amount

Determining the right amount is mostly dependent on your financial strength. It also depends upon the type of car that you wish to buy. If you intend to buy a used one, paying 10% of the selling price can be a decent option. For a new vehicle, you should always try to pay at least 20% of the selling price. 

By paying at least 20% of the total cost, you’ll be able to pay off the loan much quicker. The term of the loan will get even shorter if you can pay a higher amount. Use an online auto loan calculator to get an estimate of the monthly repayments before you settle on an amount for the upfront payment.

Bottom Line

The down payment for an auto loan plays a huge role in determining the monthly repayments that you’ll ultimately make, including the rates and terms. Hence, you should make a proper calculation of your affordability and save up a considerable amount to put down. Keep in mind that the more you pay upfront, the greater the benefits you’ll enjoy.