Key takeaways

  • Down payments reduce the amount money you must borrow, and thus the interest you pay while repaying your car loan.
  • Experts recommend a down payment of at least 20 percent.
  • Larger down payments may prevent becoming upside-down on your loan.

A down payment includes the cash you have on hand, the value of your trade-in and any rebates you qualify for. All of these work together to reduce the amount you need to borrow. They show lenders you are serious, which in turn can help you score a better interest rate.

5 benefits of making a down payment

Down payments are usually a necessity — lenders frequently want at least 10 to 15 percent down. And it may be better for your finances to put down even more. After all, it can save you money each month and help you pay less interest.

1. Lower monthly payment

Since putting money down reduces the overall amount you need to finance, you can expect to pay less each month. That means a lower monthly payment.

It’s easy to see the math. Use an auto loan calculator to estimate monthly payments. If you borrow $30,000 at 6.6 percent interest for 48 months, you’ll pay $713 a month. With a 20 percent down payment of $6,000, you’ll cut the amount you need to borrow to just $24,000. And that results in a monthly payment of $570, saving you $143 each month.

2. More equity starting out

Equity is the difference between what you owe on an auto loan and the car’s potential sale price. Large down payments increase your equity because you won’t need to finance as much through a lender.

Cars are a depreciating asset. As the value of your vehicle decreases, you’re more likely to go upside down on your loan — when you owe more than your car is worth.

A larger down payment protects against depreciation because the equity acts as a buffer. Since you own a greater portion of your car from the start with a higher down payment, you are less likely to get stuck paying for a loan that costs more than you could sell your car for.

3. Less interest paid

The biggest benefit of a large down payment is that it reduces the amount you need to borrow. When you borrow less, you pay less interest. More money in your pocket — and less in the lender’s — is always a good thing.

Just like with the monthly payment example, a 20 percent down payment can make a big difference in the cost of an auto loan. If you borrow that same $30,000 at a 6.6 percent interest rate over 48 months, you’ll pay $4,216 in interest. With a $6,000 down payment, you’ll only pay $3,373 in interest over the life of the loan.

4. Potentially lower rates

Some lenders may be willing to give you a lower rate if you have a significant down payment. Because a down payment shows you know how to handle money, you’ll be less of a risk to the lender.

There are a number of factors that influence your interest rate, like credit score and income, so this is far from guaranteed. Still, a large down payment is something that lenders consider and can help make up for areas you might not be as strong in.

5. Better acceptance rate

Lenders are rejecting about 14.2 percent of car loan applicants, according to data collected from the Fed. If you’re able to make a down payment, you could strengthen your approval odds or convince the lender to offer you more competitive financing terms.

Not putting money down may not be a deal breaker if you have good to excellent credit. However, a lower credit score means you’ll get a higher interest rate or, even worse, be turned down for a loan.

Experts suggest putting down at least 20 percent

The most common advice is to put down 20 percent or more on a vehicle. More is preferable. The less you need to finance, the better off your finances will be.

But it is a lot of money. In August 2023, the average new car price was $48,451, according to Kelley Blue Book. A 20 percent down payment on that is about $9,690. Even used cars averaged out at $26,651 — which comes to $5,330 for a 20 percent down payment.

Many buyers successfully finance a car with less than a 20 percent down payment. The current average down payment is $6,823 for a new car or $4,107, according to Edmunds — which works out to 14 percent and 15 percent, respectively.

You certainly don’t want to deplete your savings for a down payment. Take advantage of rebates if you want to buy new and shop around for a good price on your old car. Selling it or trading it in at a dealership can go a long way to getting you to the 20 percent mark.

If you can’t afford 20 percent, putting down as little as 10 percent is okay. Some lenders that work with bad-credit borrowers may only require a minimal down payment. No matter what, try to put down as much as possible to avoid taking out a big loan that could leave you upside down.

Avoid putting nothing down

You should always have a down payment when buying a car. Some experts say it might not be necessary if you’re able to score 0 percent APR — but most people won’t qualify for that.

You may not need a down payment for a leased car, either. It can still help lower your monthly payment and overall cost. However, making a sizeable down payment on a leased car can backfire if the car gets totaled.

Some dealers offer zero-down financing because they stand to make the most in interest when buyers borrow the car’s full price. That means more interest paid and a higher chance of becoming upside down on your loan.

A zero-down offer may also come with a long loan term to offset higher monthly payments. This is another trap. The longer your loan term, the more you pay to the lender.

Next steps

The more you can pay upfront, the better off you will be. A down payment of 20 percent is the go-to amount, but you can always put down more if you can afford it. Avoid paying less than 10 percent — especially if you have bad credit — so you can still secure a competitive interest rate.

Take the time to compare auto loans and find financing before car shopping. This way, you will know exactly how much you can afford and how much you will need for a large down payment.