When shopping for a new or used car, most buyers budget a certain amount for their down payment. This amount also might be added to a vehicle being used as a trade-in to further decrease the purchase price of the new vehicle. Some car dealerships might advertise that buyers can opt to put next to nothing down, and buyers might see this as a great option.
What is the average down payment? Instead of focusing on an average down payment amount, Kelley Blue Book simply recommends that buyers allocate 10 percent of the purchase price for their down payment. However, Nerdwallet recommends that buyers of used cars should put 10 percent down, while those buying new cars should opt for a 20 percent down payment.
- Secure a lower interest rate for their financing
- Pay less in interest over the life of a loan
- Offset the depreciation costs
- Possibly opt for a shorter loan term
Down Payments and the Budget
Some buyers might not have the budget for a 10 percent or 20 percent down payment, though. If a buyer purchased a new Mitsubishi Mirage (one of the least expensive models on the market) then allocating a 20 percent down payment on that purchase would equate to around $3,000. Even a 10 percent down payment would be about $1,500.
Before buying a car, buyers should review their budget to better understand how much money they could offer for a down payment. If the buyer has a vehicle that they plan to use as a trade-in, the value of the trade-in could help with the down payment, too.
Some buyers might be able to put 0 percent down. However, this isn’t always the case. In addition, buyers also could be drawn to dealerships that only require a minimal down payment—like “one dime down.” These programs or promotions could be an option for those with poor credit scores who also don’t have the financial means to make a significant down payment. Buyers should read all the details, though, to better understand loan terms, interest rates, etc.
Here’s How a Down Payment Could Impact Financing
Down payments could help buyers with their financing. When buyers have the capital for a larger down payment, the lender’s stake in the loan (or the vehicle) decreases. Those who can make a larger down payment might be able to secure better interest rates. However, larger down payments don’t necessarily guarantee better interest rates.
Down Payments Help Buyers Pay Less in Interest
A down payment of any amount helps reduce the overall cost of the vehicle. Thus, the larger the down payment, the less financing a buyer will need.
Since larger down payments decrease the cost of the car, they can help reduce the overall amount of interest paid during the life of the loan. Paying less in interest is a positive for most buyers.
Down Payments Can Let Buyers Opt for a Shorter Loan Term
In addition, those who can make a significant down payment also might be able to choose a shorter loan. By decreasing the financing needs for the vehicle, they might decide to make larger payments each month and choose a three-year loan instead of a longer term. Larger down payments could give buyers more flexibility and more favorable terms and rates.
Conversely, buyers who make a minimal down payment would need to have a larger portion of their vehicle financed. In order to keep monthly payments lower on a larger loan, buyers might opt for longer loan terms. While longer loans might keep payments reasonable, the interest rates could be higher. Longer loans also mean that buyers will pay more in interest over the life of the loan.
The Down Payment Can Help Ease the Pain of Depreciation
A new car depreciates quickly. In fact, once the buyer drives that new car out of the dealership, the vehicle depreciates around nine to 11 percent. With this in mind, those who opt for less than 10 percent down might be affected by depreciation immediately; the vehicle could be underwater by the time they drive home.
According to KBB, vehicles drop 60 percent of the original purchase cost after five years. While car owners can help ease some value loss related to depreciation by caring for their vehicle, all cars will suffer loss in value because of age and mileage.
Preparing for a Down Payment
Some buyers might not have a significant amount of extra cash sitting in their bank account to allocate for a down payment. How can they save for a car down payment? How much should they allocate for a down payment?
There are many tools online that can help buyers figure out car financing and estimate what they might expect to pay for the vehicle. These car payment calculators typically allow potential buyers to input the purchase price of the car, an amount for a down payment and potential loan terms.
Buyers can use a car payment calculator to better understand their possible monthly payments, but before they start calculating, there’s also one important factor they need to know: their credit score. Car loan interest rates typically are tied to credit worthiness or credit risk. Interest rates are more favorable for those with good credit, but rates rise with credit risk.
Buyers shouldn’t be in the dark about their credit score. Every year, consumers are entitled to a free credit report. Request the credit report and then review the credit scores for each credit reporting bureau. Consumers also will want to make sure there are no errors in their report.
The credit scores on free reports won’t necessarily mirror the scores that lenders see; however, the scores on reports will give consumers a good understanding of their credit worthiness. When consumers understand their credit, they can use the car payment calculators more effectively. For example, the car payment calculator from Nerdwallet lets consumers input their credit score to view an estimated interest rate.
Potential buyers can enter in different amounts for a down payment so better understand how this amount impacts their monthly payments. Nerdwallet’s calculator also shows consumers how much they will pay in interest over the life of the loan as well as the total cost of the vehicle.
These calculators can be a visual guide for buyers who want to understand the impact of the loan terms, down payment and interest rates for financing.
What is the Best Down Payment Amount?
Every buyer has a different budget for their car, and their financial circumstances are unique, too. While KBB recommends that buyers opt for a 10 percent down payment, not all buyers will be able to save up this amount for their down payment.
However, any down payment amount could be beneficial. The down payment can help lower the cost of the vehicle and decrease the overall amount of interest paid during the life of the loan. In addition, in some cases, a down payment also could help buyers obtain a better interest rate.
Down payments also could help offset the pain of depreciation. Vehicles lose value once they drive out of the dealership. A 10 percent down payment, for example, could help ensure that buyers aren’t underwater in their loan. When a car is ‘underwater,’ it means that the vehicle’s loan balance exceeds the value of the vehicle.
Buyers also should remember that a trade-in can help them with the down payment costs, too. A trade-in also helps lower the price of the vehicle. Before using a vehicle as a trade-in, though, car owners should research the trade-in value via KBB. This can help ensure that the owner gets a fair price for their trade-in.
Use RelayCars to Explore Vehicles
Car buyers who are researching their vehicle options can use RelayCars to preview different makes and models and find vehicles in their budget. The RelayCars app lets buyers explore models via interactive 3D imagery or virtual reality (for those with access to Google Cardboard).
Buyers also can visit the RelayCars website on their mobile device to explore vehicles in augmented reality. Use the camera on a smartphone or tablet to preview a 3D image of a vehicle in the real environment. Explore a car in the garage, the backyard or just the driveway.
RelayCars also provides buyers with all the necessary specs and data for thousands of makes and models. Compare prices and features for different vehicles to find the best option for the budget and driving needs.
RelayCars also has partnered with CarSaver.com. The site lets buyers find cars in their budget and their preferences. Use the site to find financing and vehicle insurance, too. Buyers can take their financing information to the dealership to complete the deal. In addition, CarSaver offers a lifetime warranty on vehicles and the site even lets buyers find insurance rates through Liberty Mutual. Use RelayCars and CarSaver to research cars and drive off in the best way!