Buying a new car can be equally intimidating as it is exciting. Between planning for the monthly payment, insurance, dealer fees, and other hidden costs involved with the purchase, you may wonder if a down payment is yet another cost you should worry about. Although there is no official down payment minimum when buying a car, being prepared to put down the recommended amount will remove many of the roadblocks car shoppers run into the most. We cover the recommended car down payment amount based on expert advice, the benefits of making a down payment, and what to do if you need to purchase a vehicle with no down payment saved up.
Recommended Car Down Payment
According to Experian, new car shoppers should plan for a down payment of 20% of the vehicle's price. Used car shoppers should put down at least 10% which accounts for the lower depreciation that comes with a model that's a few years old. Having the recommended down payment will improve a lender's terms, make monthly payments more manageable, and help car shoppers with bad credit get approved for an auto loan. With the average new car price hovering around $38,000, the recommended 20% down payment adds up to $7,600. For the average used car price of $20,000, a 10% down payment comes to $2,000.
Unfortunately, the down payment guidelines appear to be out of reach for most shoppers. As vehicle price tags are climbing drastically while average salaries remain fairly stagnant, many car buyers aren't prepared with the recommended down payment and choose to put down much less. Edmunds reports that the average car down payment in 2019 was just 11%.
Benefits of a Down Payment
Saving up for the recommended down payment before heading to the dealership will pay off. The bigger the down payment, the less you'll need to finance which means shorter loan terms, less interest, and lower monthly payments. If you buy a $30,000 vehicle and don't put anything down, your monthly payment on a 60-month loan will be $561 with an interest rate of 4.63%. Put down the recommended $6,000, and you'll only be taking out a loan for $24,000 which brings the monthly payment down to $449/month. You're also more likely to score lower interest rates because lenders factor in your loan-to-value ratio when determining the rates to offer.
A car down payment will also offset new car depreciation, reducing your chances of having negative equity in your vehicle. A new car's value depreciates as soon as it's driven off the lot and can fall 20% to 30% by the end of the first year. Without a down payment, you may be upside-down as soon as you make the purchase. Car shoppers with compromised credit will be more likely to get approved for auto financing with a larger down payment because it gives lenders confidence in their ability to repay the loan.
Can I Buy a Car Without a Down Payment?
If a car is totaled or needs to be replaced unexpectedly, your plan of saving up for a down payment goes out the window. While buying a vehicle with no down payment is possible, this strategy is risky and less cost-effective. Buyers with excellent credit can usually get approved for an auto loan without a down payment, but they may be leaving money on the table due to higher interest rates.
Shoppers with compromised credit who aren't able to meet the recommended down payment requirement will have more difficulty finding a lender willing to work with them. The best course of action is to look for an affordable used vehicle that requires a lower down payment and minimizes depreciation. A cosigner also helps shoppers get approved with bad credit and no down payment. This person's good credit score gives lenders confidence in the event the primary borrower defaults on payment.
Credit Karma offers one additional tip for shoppers who forgo a down payment - get additional insurance in the form of Gap and new-car-replacement coverage. Gap insurance offsets the risks involved with high depreciation and going underwater on the loan, while new-car-replacement coverage allows you to replace a new car that’s totaled with a new one of the same make, model, and equipment.