A car loan is a big commitment.
When we talk with our customers, we are often asked this important question: How much do I need to have saved for a down payment on my car?
Great question! There are a lot of different perspectives out there about how to best finance a major purchase like a new or used vehicle, and it can be difficult to know who to listen to.
There are people who argue that you shouldn’t ever finance a car, and you should instead only buy what you can afford to pay for with cash. While paying with cash is a lovely idea, we recognize that most people aren’t in a situation where they can do that, especially if they need a car right away.
There are also people who say that the down payment is no big deal, and if you can get a car without putting any money down, you should! Our take on that plan? While it can be done, it can also lead to big monthly payments and a higher risk of being underwater on your loan.
What do we recommend?
Generally, you want to have 20% of the car’s price available as a down payment. Sometimes you can make 10% work, but 20% is the gold standard of auto loan down payments.
The good news is that it is an easy number to calculate. If your new car is going to cost $10k, you should have $2000 ready for your down payment. The higher the cost of the car, the higher the down payment needs to be.
If you are buying a new car, you are going to need a larger amount of cash available for your down payment.
One way to approach a down payment is to think of it as your first payment on your car. It is a percentage of the overall price you are going to pay. By making a larger down payment, you are going to reduce the overall amount that you are financing. This reduction means lower monthly payments, and it could score you a lower interest rate as well.
What to Do If You Don’t Have 20%
If you don’t have a lot of money saved yet, you do have some options. We recommend keeping the following strategies in mind:
Buy a less expensive car.
A less expensive car will require a lower amount of cash as a down payment since the overall cost is lower. Another benefit of a less expensive or older car is that the insurance rates may end up being significantly lower.
Look for lenders that accept between 10 and 20%.
Often, lenders will accept less than 20%. In fact, the average down payment in 2019 was just 11.7%. Some ways to get a lower down payment include:
- shopping around and comparing dealerships and lenders.
- getting a well-qualified cosigner.
- taking advantage of dealership promotions during big national or local sales.
Talk with a financial expert.
Getting advice from a trusted financial expert is something that many people overlook. They think their only option is to go to the dealership and find out what is available to them there. But we encourage folks to come in and talk with us here at WEOKIE! If you’re not ready to set up an appointment, check out the free resources we provide on our website, including:
- Our guide to auto loans
- A whole bunch of financial planning calculators
- Our first-time buyer program
Start saving now.
Saving for your down payment before you need a new car is such an important financial strategy. Instead of finding yourself in desperate need of a car without a solid down payment saved, start working on saving today.
Want to know more about how to make room in your budget for a monthly car loan? The same advice we give in this free guide can be applied to saving for a down payment, too! Our free eGuide, “How to Make Room in Your Budget for an Auto or Mortgage Payment” is available for download today!