Once you’ve found the right car for your needs, whether new or used, the next step is finding financing — unless you can pay for the car and any other costs with cash, of course.
Typically, the loan process includes making a car loan down payment. Read on to learn more about what exactly an auto down payment is and how its size can make an impact on your car loan.
Key Points
• A higher down payment decreases the total loan amount, potentially lowering monthly payments and the overall interest paid over the life of the loan.
• Making a larger down payment can improve your loan terms, including a lower interest rate and better loan conditions, as it reduces the lender’s risk.
• A larger down payment can lower your debt-to-income ratio, making it easier to qualify for a car loan and potentially building your credit score over time.
• A substantial down payment can help prevent you from being “upside-down” on your car loan, where you owe more than the car is worth, especially in the early years of the loan.
• A larger down payment provides more flexibility in choosing financing options, as it can open up opportunities for better deals and terms from different lenders.
What Is a Car Loan Down Payment?
A car loan down payment is an upfront payment made by the buyer when purchasing a vehicle through financing. It typically represents a percentage of the car’s total price, reducing the loan amount and, consequently, the monthly payments and overall interest paid over the loan term.
Although some lenders will finance a vehicle without a down payment, there are benefits to putting one down for the potential borrower, too.
Recommended: Smarter Ways to Get a Car Loan
How Much of a Down Payment Should You Make on a Car?
There are several factors to consider when it comes to how much of a down payment you should make on a car. These include:
• How much you can afford to put down
• Whether you’re buying a new car or a used one
• What programs the lender is offering
• What your credit score is
Rule of Thumb for Down Payments on a Car
A basic rule of thumb for a down payment on a car is to put down at least 20% on a new car purchase and 10% on a used one.
As you’re fine-tuning your decision, it may help to consider the potential benefits of making a down payment. You don’t necessarily need to make a down payment to qualify for car loan financing, but a minimum down payment for car buying gives you some equity in the vehicle to build upon.
Recommended: What Credit Score Do You Need to Buy a Car?
4 Benefits of a Larger Down Payment
How does increasing the size of your down payment impact your auto loan? Although not all lenders require a down payment, putting one down can result in several benefits for you, including the following:
1. Streamlines Loan Approvals
When deciding which loans to approve, lenders consider how much risk they’re taking with each particular approval. When a borrower doesn’t make a down payment, the lender is taking on more risk overall and will have more to lose if the borrower defaults on the loan. Even if the lender repossesses the vehicle and resells it to recoup the loss, it may not make up the full cost of the debt because, as soon as a car is driven off the dealer’s lot, it begins to lose value.
With that context in mind, it makes sense that a down payment can help reduce a lender’s risk, making it more likely you’ll be approved for the loan. Plus, a dealer may offer special programs with a bigger down payment (but be sure that you’re clear about all of the details).
2. Lowers Monthly Payments
The larger your down payment, the lower your loan amount. The lower your loan amount, the lower your monthly payments will be and the more money you’ll save in interest.
Here’s how it works. Let’s say that you bought a $35,000 car and the lender is offering a 4% APR for five years (60 months). If you don’t make a down payment and don’t trade in a car, the monthly payment will be $645.
If you put down $5,000 (in any combination of cash and trade-in), the payment goes down to $552, which would save you $93 monthly.
If you put down $10,000? The monthly payment is then $460, which would save you $185 per month. Down payments can minimize the loan amount which in turn lowers your monthly payments.
3. Reduces Overall Interest
Besides reducing the monthly payment, having a bigger down payment means you’ll pay back less interest over the life of the loan.
To illustrate, here are dollar amounts for the three examples shared above:
• No down payment: $35,000 loan amount / 4% / 60 months: $3,675 in interest
• $5,000 down payment (14.29%): $30,000 loan amount / 4% / 60 months: $3,150 in interest
• $10,000 down payment (28.57%): $25,000 loan amount / 4% / 60 months: $2,625 in interest
You may also wonder, “Does down payment affect interest rate terms?” The answer is yes, it can, depending on what loan programs a particular lender offers. For many lenders, a lower loan-to-value ratio (the amount of the loan compared to the car’s value) can lower the interest rate they’ll offer.
4. Gets Ahead of Depreciation
Vehicles can lose 20% or more of their value annually, so if you don’t make a significant enough down payment, you could end up owing more on your vehicle than its value as soon as you leave the dealership. When that happens, it can be challenging to trade or sell your car later on.
Making a sizable down payment may prevent you from getting an upside down car loan, in which your auto loan debt is greater than the value of your car.
Recommended: Car Payment With a Credit Card
Are There Any Downsides to Making a Large Down Payment?
There may be some potential downsides to making a large down payment on a car. One of which is that it may deplete your savings. Having a sufficient amount of savings can serve as a cushion in the event of an emergency.
Making a large down payment on a car may also limit your financing or refinancing options. Some lenders may not offer financing if you propose to make a down payment that the lender deems too large.
You might not meet a lender’s financing requirements if you’re seeking to put 90% down on a vehicle that costs $25,000. Some lenders have minimum financing standards that prevent them from offering auto loans less than $7,500, for example.
What If You’re Unable to Make a Down Payment?
Perhaps you’ve been convinced by the benefits of making a down payment but you just don’t have the money. Is there anything you can do instead to try to avoid problems like owing more on your loan than your car is worth? There are a few strategies that may help if you’re unable to make a down payment:
• Buying GAP insurance: If your vehicle gets totaled, guaranteed asset protection or GAP insurance can help you fill in the gap between what you’re given by your insurance company and what you still owe the lender.
• Buying new car replacement coverage: In this case, if the vehicle gets totaled, you’d get a replacement vehicle. In some cases, this may already be part of your car insurance policy.
• Choosing a less expensive vehicle: With a lower payment, you might be able to free up cash for a down payment.
How to Save for a Down Payment
If you can defer your purchase, you may also want to consider taking some time to save up for a down payment. Strategies you might consider include the following:
• Come up with a goal. Figure out how much money you’d like to put down on a car purchase. Then, assess how much you think you can put toward it each month.
• Start a budget. If you don’t have one already, a budget can be a useful tool to help you track and control the money going in and out.
• Start a special down payment account. This can make it easier to keep the funds separate from your other money and see them growing.
• Reduce spending. Get rid of unused memberships or redundant subscriptions, for example. Also, try to avoid large purchases, at least until after you have your down payment in hand.
Recommended: How to Save Up for a Car
Used Car Vs. New Car Down Payments
In general, new cars are more expensive than used ones (although, a basic new automobile can be less expensive than a high-maintenance luxury vehicle that’s used).
That said, typically, it’s best to put down at least 20% on a new car purchase and 10% on a used one. That may be in the form of cash, a vehicle you trade in, or a combination.
When making a decision between a new or a used vehicle, note that loans on used ones typically come with higher interest rates because their value may be harder for the dealer to estimate.
Here’s a table to summarize the similarities and differences between down payments for used cars and new cars:
| New Car | Used Car | |
|---|---|---|
| Typical down payment |
• At least 20% |
• At least 10% |
| What you can use |
• Cash, trade-in, or a combination |
• Cash, trade-in, or a combination |
Other Ways to Reduce Auto Loan Payments
If you’re looking for other ways to reduce auto loan payments, auto loan refinancing may help. An auto refi loan may provide you with a lower monthly payment. Refinancing may be right for you if you can lock in a lower interest rate.
Another way you may reduce your auto loan payment is by asking your lender for relief. If you need a lower monthly payment, lenders may agree to a loan modification that can extend your repayment term. A longer term can reduce your monthly payment, but you may pay more interest over the life of the loan. A car loan length on average is about 68 months for a new car and 67 months for a used car.
Recommended: Upside-Down Auto Loans
The Takeaway
The amount of your down payment significantly impacts your car loan experience. A larger down payment can reduce monthly payments, improve loan terms, lower your debt-to-income ratio, and decrease the risk of being upside-down on your loan. By putting more money down upfront, you not only enhance your financial position, but also gain more flexibility in choosing the best financing options available.
If you already have an auto loan and are looking to reduce your monthly payments, you can consider reaching out to your lender about a loan modification or apply for auto loan refinancing.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Does a down payment directly affect the loan amount?
Yes, a down payment directly affects your loan amount. The way down payments affect car loans is they minimize the amount of money you need to borrow when financing a vehicle purchase. Borrowing a lower amount of money to buy a vehicle can give you a lower monthly payment on your auto loan financing.
What is a down payment?
A down payment on a car is a lump sum of money that’s paid upfront while the balance of the car’s cost is financed. Most, but not all, auto loan lenders require a down payment. Different financial institutions have different minimum requirements.
How big should your car loan down payment be?
Answers will differ based on how much you can afford to put down and the price of your vehicle. Your payment will need to meet the minimum requirements of the lender you choose to finance the vehicle and it may depend upon whether you’re buying a new or used car. A basic rule of thumb for a down payment on a car is to put down at least 20% on a new car purchase and 10% on a used one.
What if you can’t pay a down payment?
If you can’t pay a down payment on your auto loan, you may be able to find a lender that does not require a down payment, though your interest rate will likely be higher. You might also consider buying a less expensive vehicle, which could lower your monthly car payment and perhaps free up cash for a down payment.
Photo credit: iStock/Igor Suka
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
SOALR-Q325-001