How Much to Put Down on a Car

What a down payment does

A down payment is the part of the price you pay at signing, in cash or through the equity in a trade-in. The rest is the amount financed. A larger down payment helps you in three ways at once: you borrow less, you pay interest on less, and you start the loan with some equity in the car.

Lenders look at the same thing from their side, through the loan-to-value ratio. The CFPB defines LTV as the loan amount divided by the car's actual cash value. If you borrow $27,000 against a car worth $30,000, the LTV is 90%. The higher the LTV, the riskier the loan is for the lender, so LTV can affect whether you are offered a loan at all, its terms and its rate. Above 100%, you owe more than the car is worth from the first day.

Worked example: zero, 10% and 20% down

Take a $30,000 car financed at 7% APR for 60 months, with tax and fees paid separately to keep the comparison clean. Payments are rounded to the cent, and total interest is approximate by a few cents.

Each $3,000 down lowers the payment by about $59.40 a month and saves about $564.60 in interest. The last column shows the bigger benefit. After two years, the buyer who put $6,000 down owes $3,847.74 less than the one who put nothing down, which is a cushion against the car's falling value. If the lender also offers a lower rate because of the lower LTV, the savings grow. Run your own figures in the car affordability calculator.

How much to put down

There is no single right amount. Rules of thumb you will see quoted are just that. A practical approach is to put down at least enough to cover the tax, fees and any add-ons you finance, so you do not start the loan owing more than the car is worth, and more if your savings allow it.

• Keep an emergency fund. Emptying your savings for a bigger down payment can leave you unable to cover a repair or a missed paycheck, which is how car loans fall behind.
• Put more down on a long term. A 72- or 84-month loan pays the balance down slowly; a larger down payment offsets that. See choosing a loan term.
• Put more down if your credit is weak. A lender may make money down a condition of the loan, and a lower LTV can help you qualify or improve the offer.
• Weigh it against the rate. With a very low promotional APR, keeping cash in savings may cost you little; with a high APR, every dollar down saves real money.

Using a trade-in as your down payment

The CFPB points out that a trade-in, or selling your old car yourself, can serve as a down payment, since both cut the amount you need to borrow. If your current car is worth more than you owe on it, the difference is equity, and it works like cash toward the new car. If you owe more than it is worth, the shortfall is negative equity. A dealer may add it to the new loan, which raises your LTV and works like a negative down payment.

Check how the down payment and trade-in appear on the buyer's order and the contract. The cash you pay, the trade-in allowance and the payoff of your old loan should each be listed, and the amount financed should match the price plus tax and fees minus your down payment.

Down payment and GAP coverage

GAP coverage pays some or all of the difference between what you owe and what your insurer pays if the car is stolen or totaled. It matters most when the LTV is high: little or no money down, a long term, or negative equity rolled in. A solid down payment can make GAP unnecessary, because the balance stays closer to the car's value. The FTC lists GAP among the add-ons dealers sell and reminds buyers that saying no is allowed. If you do want it, compare the dealer's price with what your insurer or lender charges; the chapter on add-ons and GAP covers the details.

Steps before you decide

1. 1 Price the whole deal, including tax, fees and any add-ons, so you know the real amount to finance.
2. 2 Look up the car's value so you can work out the LTV for each down payment you are considering.
3. 3 Ask the lender whether a lower LTV changes the rate or the amount it will lend.
4. 4 Set aside your emergency fund first, then put down what remains that you can spare.

The next chapter explains the number that sets the cost of what you do borrow: how auto loan APR works.

Questions people ask