How Much Should a Down Payment for a Car Be? (2024) (2024)

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As a rule of thumb, it’s good to put at least 20% down on a new vehicle. Historically, this has been the down payment size lenders prefer to see. It will also get you the best interest rates.

For a used car, you don’t have to put as much money down up front — 10% is a good down payment in this situation. The difference between down payment amounts for new and used cars comes from depreciation. New cars depreciate quickly within the first year, so lenders prefer more substantial down payments for them.

However, 20% down can be a significant amount of money. According to Kelley Blue Book, the average new car sold for $48,681 in November 2022. A 20% down payment for a car at that price would be $9,736.

If you don’t have 20%, put down whatever you can afford without eliminating your emergency savings. You can even find auto loans for no money down, but they may not come with the best interest rates. Some lenders may require a certain percentage down, like 12% or 9%, so having a smaller amount available may disqualify you from some auto loans.

Try to put as much down as you can. This money goes directly to paying down the cost of the car, so you’ll have a smaller auto loan. Here are other benefits of making a larger down payment:

• Lowering your monthly payment
• Reducing the chance of being upside down on your car loan
• Lowering your loan-to-value (LTV) ratio

Lower Monthly Payment

With a larger car down payment, you’ll reduce the total loan amount and monthly payment if other terms stay the same. The table below shows what your monthly payment on a $20,000 vehicle would be if you put $2,000 down compared to $4,000. We’ll use a 60-month loan term and a 5% interest rate in this example.

Pay the Loan off Faster

You can also use a higher down payment to get a shorter loan term and pay your car loan off faster. In the example above, let’s say you got a 48-month loan instead. With a down payment of $4,000, you’d pay $368.47 per month, but you’d finish the loan 12 months sooner and pay less interest.

Being able to have a shorter loan term could get you a better rate, which would save you even more on interest.

Avoid Being Upside Down on the Loan

Another benefit of making a larger down payment is that it reduces the likelihood you’ll be upside down on the loan. With an upside-down car loan, you owe more than the car is worth. If you don’t put anything down at all, you’ll almost definitely be upside-down on your loan.

Let’s say you put $1,000 down on a $20,000 vehicle and finance $19,000 of the sticker price. With a 5% interest rate and a 60-month term, you’d owe $15,569.45 at the end of the first year. If your car were now worth less than that, you’d be upside down on your loan.

Lower LTV Ratio

As you seek to qualify for a loan, one thing lenders consider is the LTV ratio. The bigger your down payment, the lower your LTV ratio (which is good). To find your LTV ratio, divide the loan amount by the car’s value. As a basic example, the LTV ratio of an $18,000 loan on a $20,000 vehicle would be 90%.

An LTV ratio below 100% is best, though lenders may approve LTV ratios of up to 125%. This would happen if you trade in a vehicle with negative equity. You might need excellent credit or a shorter loan term to borrow with a high LTV ratio, or you might only find a bad-credit lender that gives you a horrible interest rate and a long payoff period. A down payment on a car can help you avoid this situation.

Better Chance of Approval

Because a down payment reduces your LTV ratio and can keep you right side up on a loan, it gives you a better chance of being approved for financing. A good down payment makes you less of a risk for lenders.

Putting something down is better than nothing. Even if you can only afford $500, make that the down payment on your car.

If you can’t put a decent amount of money down, your lender may require gap insurance. This covers the difference between the value of your car and what you still owe on your loan if your car gets totaled or stolen. Your auto insurance company would only cover the value of the car, so gap insurance gives the lender extra security.

Avoid Bad-Credit Car Loans

If you can’t put much money down, you might only qualify for bad-credit car loans. In this case, you want to avoid paying full price for a new vehicle. Instead, opt for a reliable used model to limit the loan amount.

Also, avoid using “buy-here, pay-here” car dealerships. These dealers offer in-house financing options and will work with almost anyone, including those with low credit scores or no credit. This means they lend to people who have a higher likelihood of default and nonpayment. Buy-here, pay-here dealerships charge higher interest rates to compensate for this, and some may even charge the maximum rate allowed in your state.

Without a down payment or decent credit, you may only find loans with high interest rates or long terms. You’ll pay more over the life of the loan than the car is worth, and you’ll risk being in debt if it gets totaled.

Consider a Trade-In Vehicle

If your car purchase includes a trade-in with a positive value, you can use the trade-in value as a down payment toward the purchase price of the next vehicle. But that only works if you own the trade-in car outright or owe less on the loan than the car’s value. If you owe more than the car is worth, you have negative equity in the vehicle and won’t be able to use it for a down payment.

A down payment of 20% for a new car or 10% for a used car is ideal, though any size down payment will reduce your total loan cost. If you only have so much to spend, choose a vehicle budget that will get you closer to the ideal down payment amount.

Our Recommendations for Auto Loans

Once you know how much you’re able to spend on a down payment, the next step is choosing the right lender. You have many more options besides the dealership’s financing. We recommend getting prequalifications from a few lenders before negotiating costs at the dealership. Our top picks include myAutoloan and Consumers Credit Union.

MyAutoloan: Best Low-Rate Option

MyAutoloan is our first recommendation for financing both new and used vehicles. The company works with a wide range of lending institutions to offer low rates, especially for highly qualified borrowers with good credit. If you decide refinancing is a better option than buying a new car right now, consider myAutoloan’s refinance auto loans.

Consumers Credit Union: Most Flexible Terms

If a credit union is more your style, we recommend checking out Consumers Credit Union. It can work with a variety of credit types. The credit union also offers members a rate discount of 0.25% for making automatic loan payments.

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.

Here are the factors our ratings take into account:

• Reputation: Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
• Rates: Auto loan providers with low APRs and high loan amounts scored highest in this category.
• Availability: Companies that cover a variety of circ*mstances are more likely to meet consumer needs.
• Customer experience: This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness, friendliness and helpfulness of each warranty company’s customer service team based on our shopper analysis.

Our credentials:

• 300+ hours researched
• 25 companies reviewed
• 2,000+ consumers surveyed

*Data accurate at time of publication.