12 Tips for Rocking Your Car Loan Down Payment: Experts Tell All

Anne-Marie Hays

Last Updated: December 8th, 2020

balancing a checkbook with a calculator
You have a lot to think about when looking for a new car, whether it's new or just new to you.
On top of that, there are many strategies and opinions about how to take advantage of a down payment when shopping for a car. While they might not be the same, most experts agree that a down payment can be a secret weapon in your auto financing odyssey.

We asked experts for advice about how to make the most out of your down payment. Here’s what they said you should know:

1. Down payments apply to principal

“A down payment is a payment that is applied to the cost of the car before the loan is applied. In other words, it gets applied to the principal.” — Chane Steiner, CEO of Crediful

“Ideally, the larger the down payment the better. Large down payments equate to shorter payment periods and lower interest rates — thus, saving you money.” — Laura Gonzalez, Marketing Manager at Audi Bellevue.

2. The 20/4/10 car financing rule

“A useful rule of thumb when purchasing a car is 20/4/10 rule. This rule states that you should make a down payment of at least 20 percent, have a loan of no more than four years, and total transportation expenses should not exceed 10 percent of your income.” — R.J. Weiss, Certified Financial Planner and founder of the personal finance site The Ways to Wealth

3. Budget with down payment calculator first, monthly payment second

“A down payment can be anything from 0 percent to 99 percent of the loan. I've used down payments to get my monthly payment within a certain range. A down payment amount should be an amount of money the consumer is willing to part with permanently.” — Kreigh Williams, personal finance blogger, eat.money.

"Most 'how much car can I afford' calculators focus on monthly payment, because that’s what most car shoppers focus on. (Because it’s the first question dealers ask!) But if you flip it, and start with how much down payment you can afford, you’re more likely to get the right car payments.

So first, figure out how much cash you’re willing to part with right now to buy your car. Then multiply it by five.

If you stick to that as your maximum car purchase price, you’re likely to get the car that’s right for your budget. Keep in mind that positive equity in a trade-in can count toward your down payment, so make sure you’re getting the most you can for your old vehicle." — Sonia Steinway, CEO, Outside Financial

4. Buy a car with 20%–30% percent down for new, 10% for a used, if you can afford it

“A down payment for a new car should be at least 20 percent of the cost of the vehicle and 10 percent for a used car. You really want to try to get ahead of the depreciation that happens when you take the car off of the lot.” — Steiner

“Most auto finance experts recommend putting down at least 20 percent of the purchase price on a new car, and at least 10 percent down on a used car. That can amount to a lot of cash. At Outside Financial, we recommend putting down as much as you can afford. — Steinway

“A good rule of thumb is that a down payment should be 20 percent of the car's purchase price. A 20 percent down payment helps keep you from owing more on a car loan than the car itself is worth.”    — Jamie Page Deaton, executive editor, U.S. News Best Cars

“It is widely considered customary to put 20–30 percent down on a financed vehicle purchase, but many buyers wish to finance the entire purchase amount or pay as little down as possible. Most people would choose to pay cash for a vehicle, but this is often not a feasible option. However, for several reasons, it is in the buyer's best interest to put as much down as is reasonably possible. The higher down payment, the less one finances; resulting in fewer finance charges, greater equity in the vehicle, and may result in better financing terms.” — Rob Drury, Executive Director, Association of Christian Financial Advisors

“Any money put towards a down payment is a piece of the vehicle cost that you won’t have to pay interest on, so it makes long term financial sense to put up as much as you can spare. But, since that is not always possible, 10 percent of the total cost is a good rule of thumb for a minimum on a car down payment.” — Jake McKenzie, Content Manager, Auto Accessories Garage

5. There’s always a risk when buying a car

“Edmunds has reported that the average car down payment was 10.40 percent of the car’s total price. My recommendation is to put down between $1,000 to $2,500 for a car lease. I remember years ago at my old dealership — we had a customer put down a substantial down payment on an exotic sports car. The next day he got into an accident totaling the car and losing his down payment.” — Roland Reznik, former high-end car dealership owner, auto transporter, now with Credit Repair Kings

6. Understand your loan-to-value ratio and more

“Because lenders know that cars lose value quickly, they worry that you’ll end up underwater (i.e., you’ll owe more on the loan than the car is worth) if you use your loan to pay for the entire car purchase.

The more you’re able to put down, the lower interest rate you can usually get, and the more likely you are to be approved for a loan. That’s because lenders take into account a few key metrics, including the loan to value (LTV) ratio of the vehicle (how much they lend you compared with the value of the vehicle) and payment to income (PTI) ratio (how much your car payment will be compared to your monthly income).” — Steinway

“Loans are underwritten actuarially, based purely on a quantitative assessment of the risk to the lender. The greater the risk to the bank, the higher the interest rate.

Based on factors such as one's credit history and the vehicle's residual values (anticipated resale and salvage values), the lender will determine an LTV percentage authorized for the loan. This is a ratio of how much of the vehicle's current market value the lender will lend; for example, if a LTV of 120 percent is authorized, the total amount approved will be 20 percent above the market value of the vehicle, to allow for such things as drive-off fees, negative trade equity, and warranties.

If the authorized LTV results in an amount less than the total purchase figure, the difference will be required as a minimum down payment.” — Drury

7. Down payment = more equity = more refinancing

“If you can swing a big down payment and get into an affordable car with lower monthly payments, it can be a great way to rehab your credit and get the transportation you need. As long as you keep the payments affordable and make them on time, you're helping yourself improve your credit rating. And, a larger down payment means more equity in your car. That equity can make it easier to refinance to a lower rate once your credit improves — saving you even more.” — Deaton

8. Big down payments can reduce interest or loan length

“The bigger the down payment, the lower the financed amount. With a smaller financed amount, you can either take a lower interest rate and pay smaller monthly payments, or keep the monthly payments relatively the same and pay your car off in a shorter period of time.” — McKenzie

9. You can avoid GAP insurance via your down payment

“A down payment should be as big as you can afford. You will pay interest on everything in a loan. Interest is money wasted. On top of that, with little to no down payment, you will find yourself upside-down on your loan. Vehicles depreciate quickly and if you buy a new car for $30,000 with no down payment, you will have a $30,000 loan and by the time you get home, your new car will have depreciated to $27,000.

If it gets totaled by hail damage or an accident that night, you’ll be responsible to pay back the full $30,000 to the lender, but your insurance will only reimburse you according to the car’s value ($27,000). So, you’ll need to purchase GAP insurance when you buy your car to help you pay for that difference in what you owe and what the car is worth.

You can avoid that extra insurance cost, though, if you pay enough down that you won’t be upside-down on your loan.” — Melanie Musson, insurance expert and writer, carinsurancecomparison.com

10. $1,000 down will affect your monthly car loan payments

“Take a look at your budget and finances to see what amount of down payment you feel comfortable with. Consider that every $1,000 you put down, your monthly payment will drop by about $15 to $18.” — Reznik

11. Down payment = bargaining power = chances for better financing options

“A significant down payment reduces the amount you owe on the car. When you owe less, it gives you more room to negotiate the price or interest rates down or crucial items together. Conversely, the more you owe, the less you have in bargaining power.

It's a signal of your goodwill to the dealer, resulting in possibly much better terms — even if your credit rating isn't good.” — Gordon Polovin, finance expert and advisory board member, Wealthy Living Today.

12. A trade-in offer can affect down payments: Buying now and buying later

“Try trading in your existing car as part of the down payment, so you are not paying cash-out-of-pocket.” — Polovin

“And remember, the less you borrow, the less interest you have to pay over the life of the loan and the lower your monthly payment will be. That doesn’t just affect this loan, either; if you end up having to trade in your car with an outstanding balance on the loan, you may have to borrow more money for your next car purchase to cover the difference, at a higher rate.” — Steinway

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