How Much Money Should I Put Down on a Car?


As you begin to save for the purchase of a new vehicle, many people struggle with how much money to set aside for a down payment. While you need to consider your own personal financial situation, there are some tips that can help you to successfully navigate your next vehicle purchase.

 In most cases, the more money you can put down, the better. This reduces the amount of money you need financing for and will speed up the time for you to own the car. But with many manufacturers offering 0% financing, the incentive to put down a large down payment is reduced, as you are not accumulating interest on a large amount owing. The problem with putting no money down on a new car is the immediate deprecation that occurs. Once you drive the car off of the lot, without a down payment, you now have a car that is worth less than the amount you owe. If you put down 20% of the car’s value and it depreciates 20% within the first year of ownership, you are not in an “upside down” situation of owing more than the value of the car.

 Lets say for example that you purchase a $30,000 vehicle. Within the first year, the car is expected to depreciate between 20 and 25%. If the car does depreciate 20%, it would be worth $24000 at the end of the first year. If you tried to sell the vehicle or had to take an insurance pay out, that’s roughly the amount you would get. The problem is that you would still owe more than $24000 on the vehicle. A scenario like this is one you want to avoid. By putting down 20% (or $6000) you have covered the depreciation and if you had to get rid of the vehicle, you would not find yourself receiving less money than you owe.

 For used vehicle purchases this is not as important. A used vehicle will depreciate at a much slower rate, and thus the danger of being in an “upside down” situation is reduced. While a larger down payment is still ideal, the risk is reduced.

 The more money you can contribute towards the payment of your vehicle, the better. A larger down payment also helps to keep your monthly payments lower and could help you get a better interest rate. The general rule is to aim for at least 10% on a used vehicle purchase and 20% on a new vehicle purchase. Doing so will give you some room to maneuver, should you need to get rid of the vehicle sooner than you anticipated. If a down payment this size isn’t realistic, try making larger monthly payments or contributing extra money to the loan, whenever you get the chance. This will help pay off the vehicle sooner, building equity and preventing financial strain. 

The qualified team at Eagle Ridge GM can assist you in determining how much money to contribute towards your vehicle purchase and can also work to get you the best auto loan at the best rate!

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