What’s the Average Down Payment on a Car, and How Much Should You Save?
The recommended down payment on a car may be much higher than expected, but there’s a good reason.
Contributing Writer at Tally
June 27, 2022
Buying a new or used car often involves taking out an auto loan and making monthly payments. When you’re applying for an auto loan, the lender will ask how much your down payment — the amount of money you’ll pay upfront for a financed vehicle — will be, which can reduce the amount you need to finance.
This may leave you wondering how much the average down payment on a car is and how much to put down. Get answers to those questions and more below.
What is the average down payment on a car?
The average down payment on a new car was $6,026 in the first quarter of 2022, whereas the average used car down payment was $3,574.
While that’s nice information to have, the average down payment is not necessarily what makes sense for you to personally pay as a down payment. There are best practices for new and used cars, but you may also have to put a specific amount down if you have a less-than-perfect credit score.
Let’s explore these scenarios to determine how much you need to save as a down payment before car shopping.
Why is a 20% down payment considered the standard?
Several sources say it’s smart to pay at least 20% of the vehicle’s selling price as a down payment on a new car.
Why so much? There are a few reasons:
You can get a lower interest rate. The lender may be willing to extend better financing terms, such as a lower interest rate, with a higher down payment. This can lower the overall cost of the car throughout the life of the loan, meaning you effectively get the car cheaper in the long run.
It can lessen the impact of depreciation. A 20% down payment can help lessen the impact of depreciation on the car’s equity. A car generally loses 20% of its value in the first year. By putting 20% down, you can avoid becoming upside down — owing more on the car loan than the vehicle is worth — at the end of year one.
This is important because if you’re in an accident and the car insurance company declares the vehicle a total loss, you may only receive the car's market value, leaving you responsible for any remaining loan amount. With the 20% down, you lessen the chances of owing money in this case.
This depreciation also plays a role if you decide you don’t like the vehicle or can no longer afford it and need to sell it in the first year. If your down payment was too small, you’ll have to come up with the cash to pay the remaining balance on the loan after selling it.
Down payment on a used car
A used car down payment will vary slightly. After that 20% dip in year one, a vehicle will generally lose about 15% of its value each year. After five years, that means the car has retained only 40% of its value.
Because of its slower depreciation rate, you can aim for a down payment amount of about 10% to 15% on a used car purchase. This may not cover 100% of its first-year depreciation, but it’ll keep the gap narrow, and the depreciation curve will steadily level out as the vehicle gets closer to the five-year mark.
Down payment based on credit
While the above are good rules of thumb, they won’t apply to everyone. If you have bad credit or no credit, the lender may view you as a risk. One way to overcome this risk and get approved is to increase your down payment. In some cases, the lender may even tell you what your down payment must be to get approved.
If the lender wants too large of a down payment due to poor credit and you can’t afford the purchase, there are some alternatives you can consider:
Co-signer: If you have a friend or family member with a more favorable credit report and a better credit score than you, you can ask them to co-sign on the auto loan. This may reduce the required down payment and even lower the interest rate. The downside is the co-signer must take equal financial responsibility for the loan, so any late payments could affect their credit score.
Trade-in vehicle: If you have a vehicle with value, you can trade in this vehicle and use the equity as a down payment on your new vehicle.
Should you make a larger down payment?
While there are 10% and 20% rules of thumb for down payments on used and new cars (respectively), don’t take them as limitations. If your budget allows you to make a large down payment, it’s wise to consider it. The less you finance, the less interest you’ll pay throughout the loan.
For example, if you buy a $30,000 used car and put 10% down ($3,000), you’ll finance $27,000. If your loan is a 48-month term at 5% interest, you’ll pay $2,846 in interest. However, if you have $6,000 to put as a down payment, your interest charges would fall to $2,530 — $316 in savings.
There is one potential exception to this, and that’s if you receive special 0% financing. In this case, you may want to put down only what you need to qualify. Then, you can consider other uses for the remainder of the cash, such as paying off other debt or investing.
Remember: You have the potential to lose your money when investing, so speak with a financial advisor before doing so.
What’s the financially responsible way to buy a car?
Many car buyers choose to finance their car because it allows them to purchase a newer vehicle and make monthly payments on it. However, this generally comes with interest charges that can significantly increase the car’s total cost over the life of the loan.
When buying a car, the financially responsible decision is to save money in an interest-bearing savings account until you’ve saved enough to pay cash for a quality used car. You may miss out on a few of the latest features, but can add them as aftermarket components using the money you save on interest and monthly car payments.
Plus, by saving the money in an interest-bearing account, like a high-yield savings account, interest is working for you instead of against you.
Buying a used car in cash may result in you settling for an older vehicle with fewer technological advancements. However, this frees up funds in your monthly budget to put toward other financial goals, such as retirement savings or an emergency fund.
A large down payment is good, but no financing is better
The average down payment on a new car is $6,026 and on a used car is $3,574, and the rule of thumb for down payments is 20% for a new vehicle and about 10% for a used vehicle. However, the reality is: It’s smart to put down even more if you can afford it.
The larger your down payment is, the less your financing will be, which reduces your interest charge. Plus, a larger down payment can improve the loan terms — such as your interest rate or monthly payment — further driving down the cost of financing.
If you really want to strive for the healthiest financial situation, it’s smart to save until you can afford to buy a quality used car with cash — opting for no financing at all.
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