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?”
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 can 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 or more 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.
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If you want to purchase a vehicle with $0 down, don’t solely rely on a car dealer to arrange auto 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 online auto finance guide.
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There are many benefits to putting a large down payment on a car when financing it. These include:
Car Buying Tip – Always try to pay an extra $10, $25, $50, or more on the principal 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.
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The $0 down ads car dealers run everywhere have 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.
Your Cash Down Payment
15-20% of the Purchase Price
Before calculating what your down payment should be, you should first figure what the true dealer’s cost is and then 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.
Once you’ve figured how much the vehicle 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.
Although, I don’t personally recommend less than 15-20% down. The absolute minimum amount of cash down you should have available 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 bumps in your credit history, bad credit or you’re attempting to finance your first car, having a down payment of at least 15-20% or more is very attractive to bad credit and first-time lenders.
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.
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.
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Use the chart below to get an idea of what kind of down payment you should save up before buying the amount of vehicle you’re looking to buy. These down payment amounts are only suggestions:
| 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 would be 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 a $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.
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If you want to buy a car and are 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 until you’re a little more financially stable 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.
| Payment over a 3 year auto loan with $0 cash 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. |
| Payment over a 4 year auto loan with $0 cash 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. |
| Payment over a 5 year auto loan with $0 cash 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. |
| Payment over a 3 year auto loan with $20% cash 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. |
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. If you were to take the term out to 42 or 48 months, your monthly payment would be a little less. However, you will start to increase your interest charges.
This is where many people get in trouble with all the in-your-face advertising about, “zero down delivers,” “no money down,” “no money out of pocket.” It’s okay to buy a vehicle with no money down, it will just cost you a lot more in the future.
