What Is a Good Downpayment for a Car?
If you are shopping for a car loan, you should try to pay at least 20% of the sticker price as a down payment on a vehicle. The rule is informally known as the 20% rule.
If you want to learn more about the 20% rule, why it exists, and what to do if you don’t have it, the car insurance comparison shopping app and licensed broker Jerry has put together everything that you need to know.
Why put down 20%?
The 20% rule is not set in stone, but it will help you save money and avoid headaches in the long run. Here’s why.
Improve your chances of getting a loan
If you have a low credit score, putting down the full 20% upfront can improve your chances of getting a car loan.
Unfortunately, not all car loans are created equal. If you have bad credit, you might have to accept less favorable loan terms. You might even have difficulty qualifying for a loan at all.
Interest rates are calculated based on how likely it is that you’ll be able to pay the loan back over the course of its term. When you have the standard 20% ready to put down upfront, you will prove to a lender that you know how to save and reassure them that you can indeed afford the car that you want to buy. The lender will also have less to lose when you offer a bigger down payment.
Lower your monthly payments
Making a 20% down payment can help you shave money off your monthly payments without having to compromise the terms of your loan.
The larger your down payment, the less than you will have to borrow. And the smaller your loan, the less you will have to pay off in the long term.
Offset the effects of depreciation
Putting 20% down on your vehicle upfront reduces your risk of owing more money on your car than it’s worth.
Being upside down—or ending up owing more on a loan than the vehicle is worth—is an unfortunate side effect of depreciation. You can expect to lose about 15% of the value of your car each year to the effects of depreciation—and twice this amount if your car is brand new!
If you end up upside down on your payments, you will have trouble getting enough to cover your outstanding car loan if you want to sell or trade later down the line.
And if you get into an accident and your car is totaled, the insurance company will typically only pay you for the current value of the car. This might be significantly less than what you owe on your loan.
You may be able to purchase gap insurance, which covers the difference between what the car is worth and what you owe—but avoiding this situation in the first place is the best option.
Qualify for extra incentive programs ||| Extra incentive programs
If you have 20% to put down on the price of your new car, you are also more likely to qualify for dealership incentives and discounts.
Of course, any incentive to buy should always be approached with caution. Dealerships are in the business of making money, so be sure to read all the terms of any incentive program before you sign on.
Pay less interest
Putting down a 20% down payment right off the start means that you can take out a smaller loan—and a smaller loan means less interest. A lower loan-to-value ratio, which is the loan amount in relation to the car’s value, can also help you land a more reasonable interest rate in the first place.
Paying less interest can easily translate to hundreds or even thousands of dollars of savings in the long run—and who doesn’t love to save money?
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Putting 20% down is the standard for cars and can help you get a better loan term, lower your monthly payment and total interest paid over the life of the loan, offset the effects of depreciation, and even let you qualify for dealer incentives.
What if you can’t afford 20%?
The magic number for a car down payment has long been 20%—but what if you just can’t afford it? If you are in this boat, don’t panic. You are not alone.
A 2019 analysis by Edmunds found the average down payment to be only 11.7%. This means that more and more people are taking out car loans with less than 20% saved up on their down payment. The most common reason is that they just can’t afford to pay more upfront.
Here are some options you might want to consider if you can’t afford a 20% down payment.
Use a trade-in to help offset the price tag
Even if that old car barely runs, it could still help you get closer to your down payment goal.
Attempting to repair old vehicles is risky, and you might even lose money in the end. Rather than deal with an old car that is a piece of junk, consider trading it in at a dealership. Some value is better than no value!
Take out a lease
If you have good credit, taking out a lease might be a better option than signing onto a less-than-ideal car loan.
Monthly payments on a lease are almost always lower than monthly payments on a car loan, which means that you can get behind the wheel of the same vehicle for less.
Likewise, you can put the money you save on monthly payments toward a better down payment in the future.
Opt for a more affordable or used car instead
Downgrading to a more affordable make or model will help make that 20% down payment goal a lot easier to reach. If you have your heart set on a specific type of vehicle, you can always choose to buy it used instead.
Purchasing a used vehicle is an intelligent way to make depreciation work in your favor. Since the value of new cars depreciates much more quickly, you can easily shave down that price tag significantly by opting to buy used.
Upgrade your insurance policy
If you decide to take out a car loan with less than 20% to put down, you might also want to consider upgrading your insurance policy.
Gap insurance is a common policy rider that will help offset the costs if you end up with a totaled vehicle while upside down in your payments. If your car is less than half paid off, gap insurance is always a good option to consider.
New car replacement insurance is an optional insurance add-on that will replace a new vehicle with another of a similar make and model year.
If you can’t afford 20% down, you have some options. Consider trading in an older vehicle, leasing instead of purchasing, or opting for a used vehicle instead. If you do decide to take a loan with less than 20% down, ask your insurer about gap insurance.
No matter what type of insurance you’re in the market for, there is no reason that you should be paying more on your insurance policy than you have to.
If you want to save money on car insurance, the Jerry app is a good place to start. A licensed broker, Jerry does all the hard work of finding the cheapest quotes from the top name-brand insurance companies and buying new car insurance. Jerry will even cancel your old policy and handle all your future renewals for you.
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