How Much is a Good Down Payment on a Car?

How Much is a Good Down Payment on a Car?

Popular wisdom says your down payment should be as much as you can comfortably afford when you’re buying a car. There are a number of reasons this is true and we’ll get into those a bit later. However, there are times when you should make as small a down payment as possible as well.

And yes, we’ll review that in more detail too; as we discuss how much good down payment is on a car.

Why Down Payments Matter

Without question, making a sizable down payment has a lot of advantages when you’re financing the purchase of a car.

Right off the top, it reduces the amount of money you’ll need to borrow to conduct the transaction. This makes your monthly payment lower, as well as decreases the amount of interest you’ll pay for the loan.

Another benefit of a hefty down payment is lenders take you more seriously. They figure you’re less likely to default on the loan when you’re putting a significant amount of your own money into the deal. In exchange — assuming your credit score is good too — they’ll offer you a more favourable interest rate.

Moreover, a sizable down payment reduces the likelihood you’ll owe more on the loan than the fair market value of the car against which it’s written. In other words, you’ll owe less than it’s worth, which is an ideal situation in which to be when you buy a car.

When They Matter Less

Making down payment
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Let’s say you’ve just run a search to “lease a car near me”. The nature of the deal you find could predicate a low or even no down payment. While the capital reduction (down payment in lease-speak) does have the potential to lower your monthly lease payment, the money factor (interest rate) applied to the lease might well garner you more substantial savings over the life of the contract.

Moreover, most leases include gap insurance to ensure the difference between the fair market value of the car and the lease payoff amount is covered. In other words, you generally don’t have to worry about being upside down in a lease.

As for qualifying, your down payment makes little difference there as well. After all, you must have a strong credit score to qualify for a lease in the first place. Putting more money down won’t make as much of a difference as it does when you’re trying to buy a car with marginal credit.

So How Much is a Good Down Payment Then?

At the risk of sounding flippant, it’s as much as you can comfortably afford when you’re buying and as little as you can get away with when leasing.

Most experts use 20 percent of the purchase price as a good rule of thumb when you’re buying a car. This will usually keep you ahead of depreciation, which keeps you “right side up” in your loan.

The amount is typically pre-determined with manufacturer offered lease deals, but you can still negotiate if you’d like to structure your own agreement.

By the way, when it comes to buying used cars; you can generally be less concerned about owing more than the vehicle is worth — as long as you get a good price on the car. Most of the depreciation will have already taken hold, so you won’t need your down payment to help you in that regard.

The main thing you want to do is keep your payments manageable, with a loan term of 60 months or less. You’re looking at an automobile you can’t really afford if you need to finance it longer than that to make the payments fit into your budget.

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