When you’re ready to purchase a car, one of the first questions to answer is how much of a down payment you need. While it’s tempting to assign a standard percentage to all car loans, the reality is that your ideal down payment won’t look like your neighbor’s. The good news is calculating the right amount for the down payment on a car isn’t as hard as it sounds. In fact, all you need is a starting point, a compass, and a map.
Know Your Starting Point
Perspective is your first necessity, and that comes in the form of your credit report. Since your loan officer will scrutinize your financial history, it makes sense for you to know what’s on your report. Plus, it’s free to order, easy to read, and puts you in your lender’s shoes. As you peruse your report objectively, ask yourself whether the borrower (you) represented on paper seems trustworthy based on timely payments, credit-to-income ratios, and cosigning trends.
Most importantly, know your credit score. This number informs your options when working out the terms of a loan, including your down payment amount.
Use a Compass
Similar to how a compass points due north, the monetary value of the car you are eyeing will keep you on track as you navigate your way to a smart down payment. That shiny and fully packaged upgraded hot rod, for example, may qualify for a low or no annual percentage rate, which means a down payment doesn’t save you much—if anything—at all.
Most people, however, are looking for something more specific to their lifestyle, such as a family van or fuel-efficient commuter car. Narrow down your search to the model or type of vehicle you’re hoping to buy. Then, use a common research tool like Edmunds or Kelley Blue Book to determine about how much the car is worth.
Map the Course
Your ideal loan will look different from the next person’s because your terms are unique. Finding the right down payment on a car is like charting a route based on many factors, all of them specific to you. Your credit, dream car, and preferred loan duration all factor in to determine an accurate down payment figure.
Consider these various scenarios. If your credit score is on life support, you might find yourself denied a loan altogether. If that’s you, focus on boosting your credit and establishing yourself as a trustworthy borrower. Low-credit or no-credit applicants may find a willing lender but realize interest rates are much higher. This should motivate you to cut expenses or add supplemental income to amass as much of a down payment as possible before entering into that painfully high-interest agreement.
Another instance where you’ll want a sizable (20 percent or more) down payment is when your dream ride is brand new, losing a portion of its value the minute you drive it off the lot. With 20 percent down, you never owe more on the vehicle than what it’s worth.
If your credit is great and you plan to buy an older used car, the above scenarios may sound foreign to you. However, that doesn’t mean a down payment and all its benefits should be dismissed. Instead, you have the freedom to choose a down payment that fits in with your other financial goals, whether that means saving for retirement, digging out of debt, or investing elsewhere.
Find the right strategy and consider the most important factors when calculating your customized down payment.