How Much Cash Should You Put Down on Your Next Car?

Written by Priyanka Correia
Fact-checked by Caitlin Wood

How Much Cash Should You Put Down on Your Next Car?

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Car Car Financing Car Loan Down Payment Loan

Cars are among the most expensive purchases Canadian consumers will make in their lifetime. As such, there are many factors that need to be taken into consideration. When you purchase a car, be sure to consider not only the purchase price of the vehicle but also the cost of maintenance, as well as how much you need to save for your down payment. 

When you first go car shopping, you want to think about the overall cost of the car that you want. Going into the dealership with your own price range in mind will help you to not get caught up with the glitz and glimmer of the cars on the lot. You also need to have a good grip on your own financial situation before you go to look for a car.

Why Do Lenders Want a Down Payment? 

A downpayment is usually required by a lender as it provides them with the security they need in case you default on your payments. Moreover, a down payment covers the gap in car value from the day it’s sold and once it leaves the lot. Most lenders don’t want to lend you an amount that is higher than the car value as it can lead to a loss if the car is repossessed. As such, lenders generally want a down payment between 10% and 20% of the car price. 

Down Payments and Cost of a Car

The down payment on your car will largely depend on two things. Your personal finances and responsibilities as well as the cost of the car that you want to purchase. The cost of the car comes into play when talking about down payments because it largely determines just how much money you’ll need to save for a down payment. If you purchase a Honda vehicle, you will likely need less of a down payment than if you purchase a car made by Mercedes. For a car that costs under 20,000 dollars, a 5,000 dollar down payment is a large down payment on the car. For a car that is past the 40,000 dollar mark, a 5,000 will be a standard/low down payment for the vehicle.

Check out how you can save money for a down payment using automatic savings.

How Much Should You Put Down? 

Monthly payments plus overall price are the secret formula when it comes to figuring out just how much you need to put down for a down payment on a vehicle. If you want to keep your monthly payments low, you will need to purchase a vehicle that is moderately priced or provide a larger down payment.

The length of time of your car loan will help to figure out just how much your monthly obligations will be for the vehicle. For instance, if you get a 15,000 dollar car loan at a 7 percent interest rate with a term of 5 years, you will pay roughly 297 per month on the car loan. If you shorten that time frame to a loan term of 3 years, you will pay around 463 dollars each month on the car. The more money that you put down on the car and the longer the payments, the lower the monthly obligation. When choosing a loan term, also understand that the longer the term of the loan, the more interest you will pay. 

Purchasing a New Car vs. A Used Car

Similarly, the amount of cash you should have for a down payment can differ based on whether you’re buying a new car, a used car or if you’re leasing a car. 

• If you’re buying a new car –  When buying a new car, putting a down payment of 20% is a good way of avoiding owing more than what the car is worth. Due to the rapid depreciation of brand new vehicles, putting a down payment of 20% is a good rule of thumb. 

• If you’re buying a used car – While a 20% down payment is still a good rule of thumb when buying a used car, your lender will still likely accept a smaller down payment. Since a used car has already undergone some depreciation, the lender doesn’t have to worry about offsetting the initial depreciation caused by a new car leaving a lot. 
• If you’re leasing a new car – When leasing a car, it’s best the pay as little as possible as a down payment. However, the amount is usually predetermined by the provider and there isn’t much wiggle room. 

Tip: If you’re looking to upgrade your old car to a new car, you can use your old car to cover the cost of your down payment. Depending on the value left in your old car, you may be able to cover the down payment partially or completely by trading in your old car. 

Can You Put Zero Down On a Car? 

Offers for zero down on a car are not very common and are usually targeted toward individuals with high credit scores. While zero down on a car sounds great, there are some drawbacks to it. For one, dealerships that offer zero down often charge higher interest rates. Secondly, putting zero down will lead to higher payments or the very least a longer repayment period. Lastly, putting zero down can lead to you owing more than what the car is worth due to depreciation. 

Benefits of a Down Payment 

Downpayments don’t just protect the lender, it also provides you with a number of benefits. 

• Easier Car Loan Approval – When you have a decent down payment, your lender will have more security and trust in you. This, in turn, can lead to faster approvals, even if you have bad credit.
• Better Financing – The higher down payment you make, the better rates and terms your lender will offer you. 
• Depreciation – New cars depreciate rapidly, especially, during the first few years. In order to avoid owing more than what the car is worth, a down payment is necessary. For example: If you total your car, your insurance may pay out the amount that matches the value of your car and not how much you still owe your lender. Thus, leaving you to pay the rest out of your own pocket.
• Affordability –  The higher your down payment, the lower and more affordable your monthly payments will be. 

Bottom Line

Purchasing a vehicle, whether it’s brand new or used, is a big decision and an expensive financial commitment. Make sure you 20% saved for a down payment and research several lenders and dealerships to get the best deal possible. For the most part, a car is a necessary expense and not an investment in your financial future. This is why affordability is so important and saving up for a significant down payment is a great first step.