How Big Should My Car Down Payment Be?

When you’re saving money to buy a car, it can be difficult to figure out exactly how much to budget for a down payment. If you don’t make a down payment at all, or if you make only a small one, you may end up with a longer loan term and a higher interest rate.

How much should I put down on a car?

It’s a good idea to make a down payment of 10 to 20 percent. However, generally speaking, the more you can put down, the less interest you’ll pay in the long run. The trick is to balance what you would like to pay with what you can reasonably afford. There’s no point in splurging on a large down payment that’s going to throw your budget off for months.

Do I even need a down payment?

This may depend on your dealership. In some cases, a down payment may not be required, but it’s smart to put at least some money down. As soon as you drive a new car off the lot, its value drops. Without a down payment, the car’s value will fall below what you paid as soon as you drive it home, leaving you upside down on your loan.

If you get into an accident while you owe more on the loan than the car is worth, your insurance company may not reimburse you for the full value of the loan. That means you’ll still owe the difference, with or without the car.

What if I decide not to put money down?

If you decide not to make a down payment and instead pay a higher interest rate, you may want to consider gap insurance until you are right-side up on your loan. Why? Because auto insurance is meant to cover the actual cash value of your car (its original value minus the amount it has depreciated), which may not help you if your vehicle is totaled while you’re upside down on the loan.

For example, if you purchased a car for $25,000 with no down payment and the vehicle is totaled in an accident three months later, your insurance company may offer to pay $20,000. But because you bought the car with no money down and have only had it for a few months, you still owe $24,000 and you’re responsible for that amount even though the car is now totaled. That leaves you to pay the additional $4,000 out of pocket — on top of your auto insurance premiums. Gap insurance is intended to pay the difference between what you still owe on the car and what the insurance company will pay for it (in this case, $4,000).

If you’re leasing a car, have a finance term of more than 60 months or are putting less than 20 percent down, gap insurance could be worthwhile. If something were to happen to the vehicle, you are insured for the value of the car when you purchased it, which can save you a significant amount of money if you’re in an accident.