The down payment you make toward a car purchase can lower your monthly bill, but some buyers don't see a benefit in that arrangement. When you have a choice, weigh the benefits of a reduced loan amount against the cash expense to make the right down payment.
A down payment only applies when you finance a car. Assume you buy a vehicle that costs $20,000. Edmunds.com notes that 10 percent down is s considered customary for used auto loans. A down payment of 10 percent on $20,000 is $2,000. Paying this amount at the point of purchase reduces your loan amount to $18,000, which also decreases your monthly payments and total interest on the life of the loan.
In a February 2014 article, Edmunds.com claimed 20 percent down is the common standard expected by lenders, especially for new or higher-priced vehicle purchases. However, the same source said the average down payment for a car in 2013 was 12 percent. The drop was credited to dramatic increases in vehicle costs relative to average income.
Some car dealers offer zero-down promotions to entice buyers, but it can be possible to avoid a down payment without one. Lenders often make such arrangements for qualified buyers on modestly-priced used cars in the $5,000 to $10,000 range. With a bank or credit union pre-approval, you can usually apply that amount to a purchase without putting money down.
Historically low interest rates contributed to low down payments in 2015. Car buyers with good or excellent credit were getting loans ranging from 3 to 7 percent interest. A low interest rate leaves fewer reasons to pay money down up front. A low down payment on a new car makes gap insurance an important consideration. Gap pays the difference when you total a vehicle while under water on a loan. Since new cars depreciate faster than loans get paid off in most cases, gap makes sense. Lenders may require gap protection with low down payments.
