When you buy a car, not only should you consider the purchase price of the vehicle, but also how much you need to save for your down payment. While you may need financing to help you cover the purchase price, you may still want to come up with a down payment on your own upfront, depending on your situation.
Key Points
- A down payment for a car in Canada is not mandatory, but it’s highly recommended.
- Some lenders may still require a down payment on a car, especially if you have poor credit.
- A down payment on a car is recommended to be at least 10% to 20%, which can help increase your chances of loan approval and reduce your monthly car payments.
How Much Of A Down Payment For A Car Should You Make?
There’s no hard and fast rule when it comes to down payment amounts on car loans. That said, you may want to aim for 20%, or as close to it as possible.
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.
Are Down Payments Mandatory To Get A Car Loan?
A down payment is not mandatory for a car loan in Canada. However, lenders may require a down payment to minimize their risk, especially if certain aspects of your financial or credit health are not up to par. A down payment provides lenders with some security 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 owing more than what your car is worth. As such, lenders generally ask for a down payment between 10% and 20% of the car price.
Down Payment On A New Car Vs. Used Car
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 one.
If You’re Buying A New Car
When buying a new car, putting a down payment of 20% can help you avoid owing more than what the car is worth due to the rapid depreciation rate of new vehicles.
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. Unlike buying a car, where a down payment lowers the overall loan amount and interest, a higher upfront payment made on a lease won’t reduce the overall cost of the lease. Plus, you don’t actually own the car when you lease it, so putting more money into the vehicle with a lease makes little financial sense.
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 calculation will be as follows:
$20,000 x 20% = $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 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.
However, 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 selling privately takes more time and work, as you’ll have to market the car and vet buyers if you’re selling on your own.
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. Even if they do, there are some considerations to make before choosing this route:
- Interest Rates – If you’re unable to pay off the credit card balance by the next payment due date, you’ll end up carrying the balance forward and will be charged a hefty rate on that amount.
- Transaction Fees – Some car dealerships may charge transaction fees when you use a credit card to fund your down payment, which can be around 2% to 4% of the transaction amount.
What Are The Benefits Of A Down Payment For A Car?
There are several perks to making a down payment when financing a vehicle purchase:
Increase Your Chances Of Loan Approval
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.
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. Not only will you have less to repay, but your monthly payments will be smaller.
Lower Interest Rate
By making a larger down payment, you’re reducing the lender’s risk. In exchange for this lower risk, your lender may be more willing to extend a more affordable interest rate on your car loan, which can save you quite a bit of money over the loan term.
Avoid Negative Equity
The less you put down on a car loan, the higher the chances of becoming “upside down” on your loan, a scenario that involves owing more on the loan than what the vehicle is worth. In the event that your car is 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. With a larger down payment, you can minimize the risk of having negative equity in your car and can avoid these unfortunate circumstances.
Can I Buy A Car Without A Down Payment?
Yes, you can buy a car with no down payment, as it’s not a mandatory requirement. 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.
Are There Any Drawbacks To No Down Payment?
Consider the following potential drawbacks of financing a car with no down payment:
- You may be charged a higher interest rate.
- You’ll have bigger loan payments.
- You could potentially owe more than what the car is worth over time due to depreciation.
- You’ll pay more interest over the loan term.
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 if you finance with a small down payment or no down payment at all. 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 making payments yourself.
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. However, the co-signer assumes great risk if you’re unable to continue making payments. If this happens, the co-signer will be on the hook to make payments.
Try Gap Insurance
Also known as “guaranteed auto protection” insurance, gap insurance is an 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. That way, 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.
Are There Disadvantages Of A Large Down Payment On A Car?
While making a large down payment on a car has its benefits, as mentioned, there are some potential drawbacks to consider. Namely, you’ll be depleting your savings by allocating much of your capital to your down payment.
Depending on how much liquid cash you have on hand, making a very large down payment on a car could impact your ability to handle unexpected or emergency expenses, such as medical bills or home repairs.
Even if you’re covered for emergency expenses, depleting your financial resources by tying them up in a car purchase could cost you possible financial investment opportunities. The money used for a large down payment could be invested elsewhere, such as buying stocks that could generate healthy returns.
Bottom Line
Purchasing a vehicle is a big decision and an expensive financial commitment. Ideally, you should have at least 10% to 20% saved for a down payment to boost your chances of loan approval, secure a lower interest rate, and keep your monthly loan payments low.
