How Much Should My Car Down Payment Be?

Your car loan down payment has an impact on the interest rate, the monthly payment and if you're approved at all.
Shannon BradleySep 17, 2021

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In general, you should strive to make a down payment of at least 20% of a new car’s purchase price. For used cars, try for at least 10% down.

If you can’t afford the recommended amount, put down as much as you can without draining your savings or emergency funds. The more you can put down when buying a car, the better your financial position will be when you drive away.

Many people do buy cars with lower down payments.

Some simply don’t have enough money saved to put down the recommended amount, especially as car prices have skyrocketed. In 2021, the average price of a new car was approaching $42,000, meaning a 20% down payment would be $8,400. For used cars, the average price surpassed $25,000, so 10% down would be $2,500. These down payment amounts can include cash, the value of a trade-in or both.

Other people can put little or nothing down on the car because their credit scores, previous auto loan history and debt-to-income ratio indicate little risk for a lender.

Why your car down payment amount matters

Lower your interest rate

Typically, the more you put down, the lower your interest rate will be. Making a substantial down payment and financing less of the purchase price signals to lenders you are a lower-risk borrower. Also, with a lower loan amount, you can most likely go with a shorter term and pay less in interest over the life of the loan.

Lower your monthly payments

Putting more down reduces the amount you'll need to finance and helps you to pay the loan off sooner. As a general rule, every $1,000 in the down payment reduces your monthly payment by $15 to $18.

You can use our auto loan calculator to see how various down payment amounts will affect your monthly payments.

Lower your loan-to-value ratio

Auto loans are secured by the value of the car, and lenders have limits for how much a person can borrow compared with the value of the vehicle — called loan-to-value ratio, or LTV. Every lender has its own LTV rules for loan approval, and in some cases, a larger down payment can help you fall within a lender’s LTV ratio requirement.

Also, lenders use the LTV ratio as a measure of a loan’s risk. When you borrow less than the car’s value, it reduces the risk of the lender losing money if you default on the loan. Loans considered to be lower risk tend to come with lower interest rates.

Avoid being upside down on your loan

When you buy a new car, it loses about 20% of its value through depreciation in the first year. That’s why experts suggest making a bigger down payment on a new car than on a used one.

If you make a down payment of less than 20%, you could end up owing more than the car is worth. This is called being "upside down" or “underwater,” and it can put you in a precarious financial situation. If you decide to sell or trade the car, you would owe the difference.

If you’re in an accident and your car is totaled, the insurance company’s payment — which is based on the cash value of the car — may not cover the full amount you still owe. (Gap insurance is intended to cover this risk.)

Improve your chance of loan approval

If you have no credit or a lower FICO score (about 620 or below), a larger down payment can improve your chances of being approved for an auto loan. And if you are approved, you may qualify for financing with better terms and a lower interest rate. In fact, some lenders require a down payment of 10% or $1,000, whichever is the lower amount, for car buyers with no credit or a low credit score.

Figuring out what makes sense for a car down payment

Because of the financial advantages, the more you can put down on a car the better. The best approach is to put 20% or more down on a new car and at least 10% on a used car if you can afford it.

If these recommended percentages are out of reach, ask yourself if you can delay purchasing a vehicle. Waiting can give you time to save more toward a down payment. If you don’t have a monthly budget, create one. Determine if there are expenses you can cut and how much. Then, set up an automated transfer to a savings account to begin building a larger down payment.

If you can’t put off buying a car, know that many people do put less down and pay off their car with no financial issues. If your financial situation improves, you can still pay extra on your car payment to keep from being upside down and pay off your loan sooner. You might also consider refinancing your car loan, which could give you a new opportunity to lower the interest rate and monthly payment.

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