The Insider's Guide to Car Buying ☰ 

How Much Money Should You Put Down on a Car?

Man counting out his cash down payment. |

One of the most common questions I'm asked is, "how much money should I put down buying a new or used car?" Car dealers advertise, "$0 Money Down" or "No Money Down" to lure car buyers like yourself into dealerships across the Nation. So the question is, "Is not putting any cash down when buying your next car really a good idea?"

$0 Down Delivers - Drive a New Car Home Today!

In the buyer's mind this sounds like a great deal. Not having to put any cash down and you get to drive off in a brand new car right now, who doesn't want to sign up on that program?

Although $0 down sounds very exciting, it's not. Not putting any money down at the time of puchasing a car can end up costing you thousands of dollars over the life of the loan.

All because dealers promote "no cash down" in their advertising, doesn't necessarily mean it's a good deal for the buyer. How does putting no money down affect you in the long run? I'll answer these questions and more for you below.

Do You Have to Put Money Down on a Car?

The quick answer to this question is "No, you don't have to put cash down when buying a new or used car!"

If you have an excellent credit score, long credit history, and are able to budget for the full amount of the monthly car payments, you will not be required to put any money down when buying a vehicle. If you have some bumps in your credit history or bad credit. The lender may or may not require a minimum of 10% down of the purchase price of the vehicle at the time of buying the car.

Keep in mind, not putting money down when purchasing a vehicle will actually make you pay more for the car in the long run. When financing a vehicle through a bank or lender, any money borrowed will be subject to interest charges. If you don't at least put enough cash down to cover your tax, title, license and fees. You will be paying unnecessary interest on it as well. The golden rule is, The less money you borrow, the less interest you will pay, the more money you will save.

If you want to purchase a vehicle with $0 down, don't solely rely on a car dealer to arrange financing for you. Protect yourself from dealer finance scams by arranging a pre-approved auto loan first to see what kind of interest rates you will qualify for. You can use your pre-approved auto loan as leverage when negotiating finance rates and terms with the dealer. You can read my tips on how to get a pre-approved car loan in my Auto Finance Guide.

Insider Car Buying Tip - Always try pay an extra $10, $25, $50, or more on the principle amount when making your monthly car payment. This extra money will add up over time and help decrease interest charges over the length of your car loan.

Benefits of Putting Money Down on a Car

Some of the benefits of putting a large down payment on a car when financing it include:

  • Lowers the overall amount financed saving on interest and finance charges.
  • Decreases the LTV (Loan to Value) which in greatly increases your chances of being approved by a bank or lender.
  • Shows your commitment to the lender, with a little "skin in the game" you're less likely to default on the car loan.
  • Lowers your overall monthly car payment.
  • You can finance your vehicle for a shorter term and pay it off quicker.
  • Less likely to be in a negative equity or upside down situation.

How Much Money Should You Put Down on a Car?

The $0 down ads car dealers run everywhere has changed the thinking of the car buying society. Even though $0 down sounds appealing, it's a COSTLY mistake! Car dealers and finance companies advertise "$0 money down" because they know it's appealing to the customer and they make more money from interest when you buy a car this way.

Before calculating what your down payment should be, you should first figure a fair profit new car offer. Having an idea of what price you want to pay for the vehicle will help you estimate how much money you will need for a down payment.

Cash Down Payment = 15-20% of the Purchase Price

Once you've figured how much the vehicle you want is going to be, multiply it by 15-20%. Although this is not possible for everyone, you should always aim for at least a 15-20% down payment when buying a car, the more the better. Larger down payments will help you avoid high monthly car payments, longer terms, excessive bank finance charges, and being in a negative equity situation when you decide to trade or sell the car in the future.

Having a large down payment will also increase your chances of qualifying for a low interest car loan. You can apply for a loan with your bank or credit union, but I suggest using online auto finance lenders for the best interest rates.

Although, I don't personally recommend less than 15-20% down. The absolute minimum amount you should put down is at least the total of your tax, title, and license fees (TT&L). Paying interest and finance charges on taxes and fees doesn't make good financial sense. Putting a little money down is always better than putting no money down.

If you have bad credit or you're attempting to finance your first car, having a down payment of 15-20% or more is very attractive to bad credit lenders. Before you apply with a bank or lender, I recommend you read our tips on how to increase your chances of being approved for an auto finance loan and where to find bad credit auto loans online.

Taking the time to save up a down payment before buying a new or used car will pay off tenfold when it comes time to trade in your vehicle. By not putting any money down, you're creating bad car buying habits that will come back and haunt you in the future.

The Vehicle's Price Determines How Much Cash Down

Below is a rough chart to give you an idea what kind of down payment you should save up before buying the amount of car you're looking to buy. These down payment amounts are only suggestions:

Money Down vs. Vehicle Purchase Price

Vehicle Price 15% Down 20% Down 25% Down
$6,000 $900 $1,200 $1,500
$8,000 $1,200 $1,600 $2,000
$10,000 $1,500 $2,000 $2,500
$12,000 $1,800 $2,400 $3,000
$14,000 $2,100 $2,800 $3,500
$16,000 $2,400 $3,200 $4,000
$18,000 $2,700 $3,600 $4,500
$20,000 $3,000 $4,000 $5,000
$25,000 $3,750 $5,000 $6,250
$30,000 $4,500 $6,000 $7,500
$35,000 $5,250 $7,000 $8,750
$40,000 $6,000 $8,000 $10,000
$50,000 $7,500 $10,000 $12,500

If you know how much money you have to put down and would like to know what percentage it is of the purchase price. Take your down payment amount and divide it by the vehicle's purchase price.

An example would be, if you had $2,200 down payment saved and you wanted to buy a $14,000 car. You would take $2,200 and divide it by $14,000. This gives you a 15.7% down payment.

Money Down vs. Increased Auto Loan Term

If you want to buy a car and lacking a down payment. Don't worry, the car salesman will have a "great idea" and show you how easy it is to lower your payments without having any additional money down. DO NOT fall for an extended term, car dealers do this by increasing your car loan term, sometimes extending it out by a few years or more.

$0 Down + Extending the Term of the Car Loan = Costly Over Paying!

Extending your loan term does indeed lower your total monthly car payment by spreading your total amount financed over a longer period of time. However, what the car salesman is not telling you is that in reality you're paying hundreds, if not thousands of dollars more in additional interest and finance charges.

I've seen people finance cars with $0 down for as long as 84 and 96 months to get their payments into an affordable range. These people do whatever it takes so they can drive a certain car they want. Personally, I believe that's crazy! Extending your term out 72, 84, and even 96 months is just asking for trouble.

If you don't have at least a 15-20% down payment and have to finance over 48 months to fit a car payment within your budget, you may want to consider a less expensive car, save a larger down payment, or wait a while before purchasing a vehicle.

Let's experiment for a minute. For this example we'll finance a new car we've negotiated to $18,000 out-the-door. No trade-in, no money down, 7% interest rate, and I'll use a 6% sales tax rate. There may be some minor state-to-state fees or other costs, but for this example I won't use them.

Interest on a 3 Year Term with $0 Down

$18,000.00 = Agreed upon new car purchase price.
$1,080.00 + 6% sales tax rate.
$2,128.86 + Interest over a 3 year auto loan at 7% APR.
$21,208.86 = Total of car loan payments over 3 year term.
$589.14/mo = Your monthly car loan payment.

Interest on a 4 Year Term with $0 Down

$18,000.00 = Agreed upon new car purchase price.
$1,080.00 + 6% sales tax rate.
$2,850.93 + Interest over a 4 year auto loan at 7% APR.
$21,930.93 = Total of car loan payments over 4 year term.
$456.89/mo = Your monthly car loan payment.

Interest on a 5 Year Term with $0 Down

$18,000.00 = Agreed upon new car purchase price.
$1,080.00 + 6% sales tax rate.
$3,588.41 + Interest over a 5 year auto loan at 7% APR.
$22,668.41 = Total of car loan payments over 5 year term.
$377.81/mo = Your monthly car loan payment.

Although your payment will be higher with a shorter term, you'll save money by only paying $2,128.86 in interest on the 36-month term versus $3,588.41 going with the 60-month term. That's a difference of $1,459.55 in your pocket.

Now let's see what a 20% down payment on a 36-month term looks like:

Interest on a 3 Year Term With 20% Down

$18,000.00 = Agreed upon new car purchase price.
$1,080.00 + 6% sales tax rate.
$19,080.00 = Subtotal amount financed.
$3,600.00 - 20% down payment.
$15,480.00 = Total amount financed.
$1,727.19 + Interest over a 3 year auto loan at 7% APR.
$17,207.19 = Total of car loan payments over 3 year term.
$477.98/mo = Your monthly car loan payment.

How a Car Dealer Can Steal Your Down Payment

Many people are afraid to put money down when they buy a car because they believe the dealer will steal it from them. As long as you keep track of your down payment money you will not have a problem.

"Money Down has No Effect on the Sales Price of a New or Used Car"

You should not tell a car salesman you have a down payment until you've agreed on the purchase price of the vehicle you want to buy. If someone asks if you have a down payment, tell them you don't have the funds available at this time. The only reason a salesman wants to know if you have cash down is so the sales manager can manipulate the numbers in the dealerships favor.

If a car salesman presents you payments only, or tries to confuse you by using the "four square" technique, or some other presentation. Tell them the only thing you're interested in is the lowest price they'll sell the car for and you're not interested in payments or anything else at this time.

You can compare the price they present you with your fair profit new car offer. This will let you know if the dealer is offering you a good deal or if there's still room to negotiate.

Only after you've agreed to the purchase price of the vehicle you can tell them you have a down payment. The exact amount of your down payment should be subtracted from the purchase price after tax, title, license, or any other mandatory fees as in the example below.

How to Correctly Deduct Money Down

$18,000.00 = Agreed upon new car purchase price.
$1,080.00 + 6% sales tax rate.
$19,080.00 = Subtotal amount financed.
$3,600.00 - 20% down payment.
$15,480.00 = Total amount financed.

How Dealers Steal Your Down Payment

$20,000.00 = Vehicle purchase price. (Artificially raised)
$1,200.00 + 6% sales tax rate.
$21,200.00 = Subtotal amount financed.
$3,600.00 - 20% down payment.
$17,600.00 = Total amount financed.

In the example above, the dealer is stealing $2,000 of your down payment. All they did was raise the selling price of the car by $2,000 and that of course makes $2,000 of your down payment disappear. This is not the only way a dealer can steal your down payment, but it is the most common way. Dealers are experts at manipulating the numbers during a car deal.

Not only is this nasty dealer tactic used to steal down payment money, it's also used to make trade equity, incentives and customer rebates magically disappear.

You may think this would be easy to catch a dealer attempting to steal your down payment. I'm here to tell you, it happens to people every day. Especially if you go into a car dealership unprepared or focused on a monthly payment.

"By failing to prepare, you are preparing to fail" - Benjamin Franklin

You can avoid this dealer scam by being prepared before ever stepping foot into a dealership. Know the price of the car you want to buy before deducting your down payment amount.

Visit automotive online sites such as CarClearanceDeals and Edmunds to request online new car price quotes. Using the best online car buying sites to get car dealers to compete online will always net you the best new car price.

Never Give Cash or Checks to a Car Dealership

Never give a car dealer cash to hold a vehicle or as a deposit. Car salesmen will ask you to give them a deposit or your cash down to take to the manager to show them you're a serious car buyer. Do not fall for this scam; tell the salesman you'll give them your money only when you both come to an agreement on the car's price.

Reasons why you shouldn't give a dealer cash or checks:

  • If you give cash or a check to the dealer it can be very difficult to get all of your money back if the deal goes south, or falls through for any reason.
  • It's best to use a credit card for any financial transactions with a car dealership. You can always contest the charges with your credit card company if something goes wrong with the deal.
  • If a car dealer tells you there is an additional charge or fee for using your credit card. Just ask them, "do you want to sell me the car?" If they insist on charging you the fee you can negotiate it, pay it, or thank them for their time and go find another dealership that will be more than happy to waive the fee for you. Personally, I was never willing to lose a car deal over a credit card fee. It's the cost of doing business.

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Did You Know?

Is the factory invoice price of a new car what the dealer actually paid for the car?

False - Factory invoice is what a dealer paid for the vehicle from the manufacturer, it is not the dealer's true new car cost.

Once the vehicle is sold by the dealer, they may receive additional money from the manufacture such as dealer holdback, rebates or secret incentives that can be as much as a few thousand dollars.

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