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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 for the car.

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.

Do You Need To Make A Down Payment For Your Car?

A down payment 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 between the car loan and the value of the car. 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. Cars depreciate very quickly, so you can often end up owning more than what your car is worth. As such, lenders generally want a down payment between 10% and 20% of the car price. 

Benefits Of A Down Payment For A Car

There are several perks to making a down payment when financing a vehicle purchase:

Less money borrowed

  •  Making a bigger down payment from the get-go means you won’t have to borrow as much to finance your car. With a smaller loan amount, you may find it easier to get approved for an auto loan. 
  • The less you have to borrow, the lower the risk for the lender. In exchange for this lower risk, the lender may be more willing to reduce your interest rate. Plus, you’ll pay less in interest over the life of the loan. 
  • A smaller loan amount and lower interest rate will lead to lower monthly payments, making your loan more affordable.

Avoid negative equity

The less you put down on a car loan, the higher the chances of becoming “upside down” on your loan, which means you owe more on the loan than what the vehicle is worth. If your car is ever totalled, you’ll have to pay the difference between your insurance provider’s payout and your outstanding car debt. Similarly, if you want to sell the car, you’ll be paying more on your auto loan than what you can sell the car for. 

More Equity

A larger down payment means you’ll have more equity in the vehicle, which refers to the difference between the value of your car and your loan balance. The more positive equity you have in the car, the lower the chances of having negative equity. This is especially important with car loans because of how quickly automobiles lose their value. New cars, in particular, depreciate more quickly than used vehicles, at an average rate of 20% to 30% within the first year.

Increase Your Chances Of Qualifying For Financing

Your down payment can affect your ability to qualify for a car loan. When you make a down payment you reduce the amount of risk a lender takes when lending to you. Many lenders like Clutch will offer low rates and flexible terms to those who provide down payments, especially large down payments. 

With large down payments, you could finance more expensive cars and protect yourself from negative equity due to depreciation. 

How Much Should A Down Payment For A Car Be?

There’s no hard and fast rule when it comes to down payment amounts on car loans. That said, a higher down payment is better, for the reasons discussed above. And while car dealers don’t typically require a down payment, you may want to aim for 20%, or as close to it as possible.  

Again, a bigger down payment will mean less money borrowed and less interest paid overall, making your loan easier to get approved for and more affordable. Of course, your budget will dictate how much you can afford to pay upfront when buying a car and taking out a loan. While a bigger down payment is ideal, even a smaller one is better than no upfront payment at all. 

How To Calculate Your Car Down Payment?

To figure out what your down payment will be, multiply the price of the vehicle by the down payment percentage you plan to make. For instance, if the car you’re buying is $20,000 and you’re aiming to make a 20% down payment, the calculations will be as follows:

$20,000 x .02 = $4,000

In this example, your down payment would be $4,000. 

Then, you’ll subtract this down payment amount from the purchase price of the car. This will give you the amount you have to borrow:

$20,000 – $4,000 = $16,000

In this case, you’ll need to borrow $16,000 to finance this vehicle purchase. 

Can You Put Zero Down Payment For 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 payments 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. 

Can You Use Your Old Car As A Down Payment?

If you already have a vehicle, consider trading it in. Then put its value towards the purchase of a new vehicle. The trade-in value can be used as a down payment. Car dealers typically accept old vehicles as trade-ins. Though you may not get as much for your car as you might if you sold it privately.

While trading your car in at the dealer is easier, selling privately can get you more money for your vehicle. The money you get for selling the car can be used as a down payment for a new vehicle. Just keep in mind that you’ll have to spend some time marketing the car, and vetting buyers, if you’re completing the transaction on your own.  

Down Payment On 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 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 vehicle 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 to 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 wholly by trading in your old car

Tips On Buying A Car With No Down Payment

If you can’t come up with the money to make a down payment, there are things you can do to maximize your chances of securing an affordable auto loan:

Get A Cosigner 

Although you may not necessarily need a down payment to take out a car loan, your chances of getting approved won’t be as strong. And even if you are approved, you might find yourself paying a higher interest rate as a result. 

If you can’t afford a down payment, consider adding a co-signer to the loan agreement. A co-signer is someone with good credit who agrees to take over the loan payments in the event that you miss one. The addition of a co-signer can lower the risk for the lender, so you’ll have an easier time getting approved at a lower rate. 

Try Gap Insurance 

Gap insurance, also known as “guaranteed auto protection” insurance. Is an insurance add-on you can buy that will provide you with extra coverage when you’re underwater on your loan. If your car is ever stolen or totalled and you owe more on your car loan than what the vehicle is worth. Your gap insurance policy will cover this difference so you don’t have to come up with the funds yourself. 

Buy A More Affordable Car

An easy way to keep your loan costs down is to simply buy a less expensive vehicle. The lower the ticket price, the less you’ll have to borrow to finance the purchase. 

If you’re buying new, consider going with the base model without all the added frills. Or, opt for a used vehicle. This can shave thousands of dollars off the price. Plus, used cars don’t depreciate as quickly as new cars. 

Bottom Line

Purchasing a vehicle, whether it’s brand new or used, is a big decision and an expensive financial commitment. Make sure you have 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.

Down Payment For Car FAQs

Can I use my credit card for a down payment?

Using your credit card to cover your down payment should only be considered as a last resort. This is especially true if you’ll be carrying this big balance month-over-month. As credit cards come with very high-interest rates on balances carried forward. You’ll also need to see if the lender will allow credit cards as a source for a down payment.  In this case, you may want to consider not making a down payment at all and see if you can secure a car loan without one.

Can I buy a car without a down payment?

Yes, you can buy a car with no down payment. However, it’s not recommended. As mentioned earlier, a lack of a down payment means you’ll have to take out a larger loan. This will increase your monthly payments and make it more difficult to get approved for a loan at an affordable interest rate.  No down payment also means no equity in your car, which can put you at risk of having negative equity in your vehicle. Even a small down payment is better than none at all.

How does a down payment affect my car depreciation?

A down payment can offset depreciation. As noted, new cars typically lose between 20% to 30% of their value within the first year of being driven. Then, they lose around 10% to 15% in value every year following.  A down payment adds equity to your vehicle, which can protect you from an upside-down loan. The bigger your down payment is, the more equity you’ll have, which can reduce your risk of negative equity even more.

What happens if my car has negative equity and is totalled?

If you totalled your car, your insurance will pay out the amount that matches the value of your car and not how much you still owe your lender. So if you have negative equity, you’ll be left to pay the rest out of your own pocket.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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