A deposit on a new car can serve many purposes, from reducing your total interest charges to reserving a car so that a dealer won't sell it to another buyer first. You can also put down a deposit if you're buying a car from a private-party seller.
You can make a down payment in any number of ways, including writing a check, wiring money to a dealer or even paying cash. Some dealers may even accept credit card payments for a down payment. The larger the down payment, the smaller your monthly payment will be and the less you'll pay in interest over the course of your loan. Additionally, a larger down payment ensures you don't end up "upside down" on your car, where you owe more than the car is worth. This scenario can unfold if you don't pay much upfront and your car depreciates faster than the amount of your monthly payment. A down payment of 20 percent of the sale price is often recommended as an appropriate down payment for a new car.
In some instances, a car dealer may require a deposit to make a reservation for a new car. This is more common if you are ordering a custom-built or hot-selling car, as a reservation deposit indicates you are a serious buyer and helps prevent losses on the part of the dealer.
If you're putting up a deposit as a buyer, make sure you understand the seller's refund policy. While reputable dealers may offer refundable deposits, they are not required to by law, so read your contract carefully before you commit to making a deposit. While there are many ways to leave a deposit, a credit card may be your best option as it helps protect you in case of fraud or misrepresentation by the dealer. If you give cash or a cashier's check, it can be harder to get your money back.
Some private sellers may ask for a deposit if you're trying to buy a used car. Since private sellers don't finance car sales, your deposit in a private sale works like a reservation deposit rather than a down payment. However, if you're taking out a separate loan to pay the seller, the amount of the deposit reduces the amount you have to borrow.
A private seller can't require you to put down a deposit, but he can choose to sell the car to another buyer if you're not willing to do so. Private sellers can be harder to pursue for the return of a deposit than a car dealership, so understand the risks going into the transaction. Get all the documentation you can about the car and the seller to help prevent fraudulent transactions and the loss of your deposit. As with car dealers, using a credit card is often the easiest way to protect yourself, but you can also set up an escrow account to prevent the seller from absconding with your deposit.
