If you need a new vehicle, you know that there are a lot of financial considerations to keep in mind, in addition to picking out the car that meets all your needs and preferences. Purchasing a vehicle is a big decision, but deciding how much to spend as a down payment shouldn’t be. As a general rule, you should be prepared to pay at least 20% of the vehicle’s sticker price upfront.
For a $30,000 vehicle, this means you should have at least $6,000 saved and ready to spend. For a less expensive vehicle—for example, a $10,000 one—you should still have at least $2,000 ready to spend.
It might seem like a big chunk of change, and it is. Although you may see flashy offers to pay 0% down upfront, which can certainly be tempting, you should do everything you can to avoid these options.
Why Do I Need To Pay at Least 20%?
There are so many reasons to pay at least 20% when it comes to buying a car. Consider three of the biggest reasons, listed here in order of importance.
1. You Don’t Want to Owe More Than the Car Is Worth
If you are buying a new vehicle, it is critical to pay at least a 20% down payment, and it still may not be enough to avoid this common pitfall. After you drive a new car off the lot, it loses approximately 10% of its value in the first month, and you can expect the value to go down another 15% each year.
If you have made less than a 20% down payment, that means you will be underwater on your loan before you have even really gotten to appreciate your vehicle or make good progress on paying off the loan.
And don’t even think about putting 0% down. With sales tax, interest, and applicable fees, the cost of your loan will be more than the car is worth before you even drive it off the lot. Pretty scary, right?
If you wreck your vehicle and it is totaled, your insurance company will likely cover the amount the car is worth — which could be substantially less than the amount you owe on your loan.
Generally, you can purchase gap insurance to cover the difference between what you owe and what the car is worth, but it’s a much better idea to avoid getting into this situation in the first place.
2. Get a Better Loan
If being underwater on a loan does not scare you, maybe missing out on the best loan terms in the first place will. Interest rates for loans—and approval in the first place — are based upon your calculated likelihood of being able to pay back the loan over the course of its term.
If you make a low down payment or none at all, that’s a signal to financial institutions that you might not be able to afford the vehicle you purchased.
To avoid losing money on you if that happens, financial institutions will likely offer you a higher interest rate than they would if you had made a higher down payment. If you have low credit and you apply for a loan, you might not even be approved without making the 20% down payment.
3. Lower Your Monthly Payments
Of course, putting more money down upfront means that you will owe less on your car loan month-to-month. This can be very helpful to your budget, and that can allow you to save up for other financial goals.
What If I Can’t Afford a 20% Down Payment?
If you can’t afford the 20% down payment in cash, there are a few options you can consider. Most obviously, the trade-in value of your old vehicle can count towards your down payment. Even if you are trading in a junker, a few thousand dollars can go a long way towards meeting your 20% mark.
If you can’t afford the down payment at all, leasing a vehicle is a great option that will keep you on the hook only on a month-to-month basis for a short period of time, usually for a few years.
This is a great option if you have good credit but not a ton of money in the bank. You can save up for the vehicle of your dreams while still driving around a car that meets your needs.