Tips, Tricks & Trends

How Much of a Down Payment Do I Need for a Car?

When it comes to buying or leasing a new car, there are many factors to take into consideration. One of the most important components of any car deal is how much of a down payment you can put towards it. However, the amount can change depending on if you’re leasing or financing, so here are some helpful tips and advice when it comes to how much of a down payment you need when purchasing a new car.

When financing a car, a higher down payment is better

If you’re planning on financing your next new car, we always advise you to find your own financing first. Head over to your bank or credit union and see what kind of interest rates they are currently offering and what you qualify for. But the second step is to figure out how much of a car you can afford. When you figure that part out, then you can figure out how much of a down payment you can put. Of course, if you can really only afford a low amount, like $1,000 to $2,000, then that’s fine. But if you want to get the best deal out of the car-buying situation, then the higher the down payment, the better.

According to Nerd Wallet, there are a lot of good reasons for putting more money down. The main reasons are as follows:

  • You could qualify for a lower interest rate with the bank since more of the car will be already paid off
  • You can increase your approval chances for the loan from the start
  • The monthly payment will be lower
  • You’ll avoid owing more than the car is worth, also known as being “upside-down”
  • You’ll have more equity in the car throughout the life of the loan

What constitutes as a “higher down payment?” We would advise to put down 20 percent, if possible. However, 10 percent is still typically good enough to get a good interest rate and approval on a loan provided that your credit score is in good standing. According to Edmunds, a FICO score of 670 or above would be ideal.

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A worker cleans new cars at a dealership lot
A worker cleaning cars at a dealership | ADRIAN DENNIS/AFP via Getty Images

When leasing a car, the down payment amounts can vary

When leasing a new car, the down payment amount isn’t as straightforward. But the good news is that it’s typically much lower. When it comes to leasing, you’re basically only paying for part of the car (36-month lease vs a 60-month loan), so the monthly payments will lower from the get-go, as will the needed down payment. But the more money you put down on a lease, the lower the monthly payments.

According to Cars Direct, the main difference is that with a lease, the money upfront also covers the sales tax, registration fees, and acquisition fee for the car, so be sure to factor those amounts in. For example, if the necessary taxes and fees upfront total up to $1,000, and you only want to put down $2,000, then only half of it will be going toward lowering your monthly payments. As a general rule, we usually advise to put down as little as comfortably possible when it comes to leasing because if anything happens to the car (i.e. a total loss), you’ll be able to walk away from it (thanks to GAP insurance), but you’ll be out of the money that you put as a down payment.

Just think of a lease down payment as a way to control what the monthly payment will be. Fortunately, your salesperson will likely present you with a number of options and show you different down payment scenarios so that you can choose which one best fits your budget.

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A man inspects new Toyota cars on display | Justin Sullivan/Getty Images

As always, do your research

If you’re planning to lease a car and find a great advertised deal, then be sure to read the fine print at the bottom. Many automakers have national lease deals that offer low monthly payments ($400/month on a BMW 3 Series, for example), but the down payment is high, like $4,000. That’s not terrible, considering you’re buying a $40,000 car, however, just remember that if you can’t meet that down payment requirement, then the monthly payment will be higher.

On that note, always take your actual needs and budget into account. While we would all love to drive the fanciest car out we can afford, sometimes, we can’t really afford it. Take your time and shop wisely.