It’s good practice to make a down payment of at least 20% on a new car (10% for used). A larger down payment can also help you nab a better interest rate.
But how much a down payment should be for a car isn’t black and white. If you can’t afford 10% or 20%, the best down payment is the one you can afford.
Buying a car is a balancing act. Making a large down payment can work in your favor. But at the same time, you don’t want it to be so big that it causes money problems or forces you to wipe out your emergency fund.
This is where the 20/4/10 rule might help.
The 20/4/10 rule says you should put down at least 20%, and that you should choose an auto loan with a term of four years or less. Also, your total transportation costs (car payment, insurance, gas, etc.) shouldn’t eat more than 10% of your monthly income.
Big down payments
If you can’t make a 20% down payment, you’re not alone.
The average price for a new car in January 2024 was $47,401, according to the Kelley Blue Book. This would mean a 20% down payment of around $9,480.
But what car-buyers actually paid fell shy. For the fourth quarter of 2023, the average down payment on a new car was $7,074, according to Edmunds. That would be a down payment of just under 15%.
Why a down payment for a car is important
You might hear ads for “zero money down,” and while that may be tempting, it’s not always a good idea. Putting money down on a car, even less than 20%, will usually work in your favor.
A down payment removes some of the lender’s risk and transfers it to you. After all, you’ll lose your down payment if your car gets repossessed.
The less risk a lender faces, the better its loans tend to be. Putting money down on a car could lead to…
Easier loan approvals: Since you’ve got skin in the game, lenders may be willing to work with you even if you have bad credit. In other words, a down payment could get a lender to approve you when you’d otherwise be denied.
Lower interest rates: Your annual percentage rate (APR) depends on several factors, including how much you borrow. A smaller car loan means the lender will lose less money if you default, so it may “reward” you with a better rate.
Lower monthly payments: The more you put down on your car, the less you’ll need to finance. The less you need to finance, the lower your monthly payment could be (depending on your term length).
Less chance of being upside down: When you owe more on your car than what it’s worth, you have an upside-down car loan. Upside-down car loans are pesky — before you sell your car, you may need to pay the full balance of what you owe.
Thanks to car depreciation, your ride could lose 20% of its value during its first year. This, coupled with no down payment, could mean you’re upside down before you get your car home.
Gap insurance
If you’re putting down less than 20% (or less than 10% for used cars), consider buying gap insurance.
Gap insurance helps cover the “gap” you have between what you owe on your car loan and what your car is worth.
Imagine you bought a brand-new car for $40,000 with no money down. As soon as you drive off the lot, it’s worth $32,000 (because of depreciation).
If you totalled your vehicle on the way home, the most your car insurance would pay is $32,000. But if you have gap insurance, it will cover the remaining $8,000 of your loan.
Figuring how much you should put down on a car doesn’t have to be complicated. However, it does require some simple math.
First, you’ll need to know how much you need to borrow, so start car shopping. Also, think of a range of amounts you could put down on a car. For instance, maybe you can afford a down payment between $4,000 and $6,000.
After that, you should…
Prequalify for a handful of auto loans
You wouldn’t buy the first car you came across, right? The same goes for your auto loan.
You can prequalify for up to five auto loans at a time with LendingTree. It only takes a few minutes and checking rates will have no impact on your credit.
The purpose here is to get a rough idea of what APR you might qualify for.
Also, when prequalifying, don’t forget to roll dealer fees and other related expenses into your requested loan amount.
Compare offers
Your APR is the total cost of your loan, including interest and fees. The lower your APR, the cheaper it is to borrow.
But also pay attention to your loan terms. This is the amount of time you’ll have to pay off your loan.
Shorter terms usually come with lower rates (and less overall interest), but you may have higher monthly payments. To save the most money overall, choose the shortest term you can comfortably manage.
Crunch the numbers
Use our auto loan calculator to see how your down payment amount can affect your monthly car payment:
Use the lowest APR you qualified for during prequalification. Then, take the different down payments you’re considering and subtract each from the loan amount you’re approved for.
For example, if you can pay $4,000 to $6,000 on a $30,000 car, you could use $26,000, $25,000 and $24,000 as possible loan amounts to enter into the calculator, giving you three possible monthly payments.
For consistency, keep the term and interest rates the same for each possible loan amount (even though these figures might change when you get the actual loan).
Strategies to increase your car down payment
Your down payment doesn’t always have to be out of pocket. The tips below could help you boost your down payment at little to no expense to you.
Take advantage of your trade-in
You might already be planning on applying your trade-in vehicle toward your down payment. Before you do, be sure that you’re getting its full value. You can check how much your car is worth by using Kelley Blue Book.
You could also sell your car to a private party and use that money for your down payment. Private party sales tend to get you a higher price than trade-ins do, but finding a buyer can be a hassle.
Look for rebates
Captive financing (or manufacturer financing) means you’re getting your car loan straight from your vehicle’s manufacturer, such as Ford Motor Credit. If you buy a car with captive financing, you might qualify for a special rebate.
Many captive lenders offer rebates for first responders, military members and recent college graduates. These typically range between $500 and $750 and are usually applied to your down payment.
Even if these don’t apply to you, it doesn’t hurt to ask your dealer if there are any rebates available.
Shop during promotional events
Making a down payment is wise, but not all no-money-down car loans are created equal. If you have excellent credit, you might qualify for a special promotion through your car’s manufacturer. These come with more favorable terms than standard no-money-down loans.
In fact, you could get a car with zero down with no negative impact to your APR. Some even come with 0% APR, at least during an introductory period.
Like rebates, this kind of promotional event is only available if you choose captive financing (unless your dealer is running its own promotion).
Promotional events are most common around major holidays or at the end of the year. They also only apply to certain models and model years.
Maybe. If you have excellent credit, you might qualify for a no-money-down deal through your manufacturer.
However, these loans generally have higher interest rates, sometimes high enough to be considered “predatory.” They also usually apply to older vehicles, increasing your chances of ending up upside down on your loan.
Even if you have a rocky borrowing history, a zero-down bad-credit car loan might be possible. But you may want to forgo one and save for a down payment, instead.
