Once conventional wisdom always was to put 20 percent down when buying a car -- that's changed. Although the average amount of deposit made on a used car is now about 11.5 percent according to Edmunds, determining the amount of deposit, or upfront money, to pay varies depending on circumstances.
A major function of a deposit is to lower the risk to the lender if you default on your loan. Buyers with subprime credit scores, or below 670, present a higher risk to lenders than those with higher scores. Lenders will only tolerate a certain amount of risk; so the lower your credit scores, the higher percentage down payment that may be required to gain approval for the loan.
Type of Car
Some makes and models depreciate slower than others. One goal is to never owe more on a car than it is worth. If you pay only 5 percent down on a car that depreciates 15 percent a year, you may become upside down, or owe more than the car is worth, after the first year. If your car is stolen or totaled, insurance often only will give you a check for the value of the car. If you owe more than that, you'll be stuck with a loan and no car. Likewise, if, for some reason you want to sell the car before the end of the loan period, its sales price won't cover repayment of the loan. Researching car depreciation rates through sources such as Kelley Blue Book can help you calculate what size down payment is required to keep you right side up.
The more you pay down, the smaller your monthly payment will be each month. In general, your monthly payment will decrease by $25 to $30 for each $1,000 more in deposit, according to Autobytel.
Another factor is the interest rate relative to how much you can earn by investing the money. For example, if you will only be paying 5 percent annual interest on your car loan, but are earning 7 percent by keeping your money in a mutual fund account, you'd be better off leaving as much money in the mutual account as you can.
Lowering the Down Payment
If you want to keep the down payment low consider the following actions:
- Wait to buy until your credit scores improve.
- Look for gap insurance coverage, which will pay any difference between what you owe and what the insurance company typically would pay if you totaled the car.
- Buy a less expensive car
- Offer your old car as a trade-in and apply the trade-in received to your cash deposit.