The magic number for a car down payment is 20 percent, but that doesn’t mean all car buyers are able to part with that sizable chunk of cash when purchasing a new – or even used – vehicle. In fact, Edmunds says the average auto down payment on a car was 11.7 percent in 2019, the last year for which statistics are readily available. Some buyers qualify for zero percent down, but that's not always a good idea.
It all comes down to your personal financial situation and what you’re looking to buy. The recommended down payment on a used car is less than that for a new car – just 10 percent. But Edmunds nonetheless indicates that the average amount that's put down on a used car is 10.9 percent, which isn’t much less than the overall average.
Why Lenders Want a Down Payment
Lenders want to know that consumers have a stake in whatever it is they’re borrowing money to purchase. The idea is that you’ll be more inclined to move mountains to hold onto your car if you part with a fair bit of your own cash to buy it. Theoretically, that makes you less likely to skip payments, and more likely to maintain your vehicle in good condition.
Why More Is Better: Your Monthly Payment
Car payments are made up of a percentage of the amount of money you borrowed, plus interest. The interest rate on your car loan is determined by your lender. The longer your loan term, the more interest you'll pay overall. This can be significant if the interest rate is on the high side. You might be able to opt for a shorter loan term if you’re not financing as much of a principal balance because you made a larger down payment.
Let’s say that you want to buy a $30,000 vehicle. A 20 percent down payment on that would work out to $6,000. Ouch. But you’d only be financing $24,000, so you might feel able to eliminate the debt in four years rather than five. That $6,000 will save you a year’s worth of interest. By comparison, a 12 percent down payment would be $3,600. You’d have to borrow $26,400 and pay interest on an additional $2,400, most likely over a longer term.
The interest portion of your monthly car payments is more or less wasted money. It’s what you’re paying for the luxury of borrowing. You can put cash toward the purchase in the form of your down payment amount and own more of the vehicle from the inception, or you can spend your money on interest and have essentially nothing to show for it.
It Makes the Lender Happy
The lender might be willing to drop your interest rate in exchange for you putting more money down – another factor in reducing your car payments.
And here’s the flip side: You could be denied an auto loan entirely if your credit score is less than spectacular, around 620 or lower, according to Edmunds. You’re more likely to be approved for an auto loan if you have bad credit if you make a more sizable down payment, because this means the lender is giving you less money toward the car. As a result, the lender has a greater comfort level that they won't lose money on the deal.
Read More: What Is a Prime Credit Score for an Auto Loan?
The Depreciation Factor
That recommended 20 percent figure isn’t plucked out of thin air. The unfortunate reality is that your new car is going to depreciate by about 30.5 percent within your first year of ownership, according to Edmunds, although other experts put it closer to 20 to 25 percent, that magic down payment number. Dave Ramsey puts it at 9 to 11 percent by the time you drive it home from the dealership. A larger down payment offsets some, if not all, of that depreciation.
Your new car might have been worth $30,000 when you bought it, but it’s only going to be worth $20,850 a year later. You’d might be reasonably close to breaking even if you put 20 percent down – $6,000 resulting in a $24,000 loan – after a year of making payments. But you’d be “upside down” on the loan if you put less than 20 percent down, because you’d owe more on the car than it’s now worth.
Depreciation’s Effect on Insurance
This factor becomes particularly important if your vehicle is destroyed or stolen. Your auto insurance probably wouldn’t cover your outstanding loan balance if you made a negligible down payment. They’d pay only your car’s fair market value if you didn’t purchase gap or new car replacement coverage as well – more cash out of pocket that you could have put to a down payment instead.
Gap insurance makes up the difference between your car’s value and your outstanding loan balance. New car replacement coverage means that your insurer will do just that. It will replace your car if it’s totaled. Your lender might actually require that you carry this coverage if you make only a minimal down payment.
Depreciation isn’t as much of a factor if you’re financing a used car because the rate tends to slow down over the long haul. For example, a three-year-old car depreciates less than 16 percent in your first year of ownership.
Read More: Problems With Gap Insurance
How Much Should You Put Down?
Yes, there are loans to be had for zero percent down – if you can get one. They usually require stellar credit, however, and you’ll still suffer the same drawbacks. The depreciation hit alone would be significant.
There’s a lot to be said for making a 20 percent upfront down payment, if not more, but that’s just not possible for everyone. Most experts warn that you should not deplete your emergency savings in order to pull it off, because the result of that could be far more serious than any negative fallout you might experience from putting less money down on a car.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.