Finance · 4 min read
How Much Should You Put Down on a Car?
A common guideline is about 20% down on a new car and at least 10% on a used car. More down means a smaller loan, lower payments, less interest, and, just as importantly, less chance of owing more than the car is worth. That said, the right amount is whatever you can put down without emptying your emergency fund.
What a bigger down payment does
Take a $35,000 car financed at 7.5% APR over 60 months:
| Down payment | Loan | Monthly payment | Total interest |
|---|---|---|---|
| 10% ($3,500) | $31,500 | about $631 | about $6,370 |
| 20% ($7,000) | $28,000 | about $561 | about $5,660 |
The extra $3,500 down saves about $70 a month and around $700 in interest. You can try other amounts, plus sales tax, fees and a trade-in, in the auto loan calculator.
The bigger reason: avoiding negative equity
New cars lose value quickly in the first couple of years. With little or nothing down, the loan balance can sit above the car's value for a long time. That's a problem if the car is written off (insurance pays the car's value, not your loan balance) or if you need to sell. A 20% down payment gives you a buffer against that early depreciation. Long loan terms make the problem worse; see is a 72-month car loan a bad idea?
Why used cars need less
A used car has already taken the steepest part of its depreciation, so the value falls more slowly while you're paying the loan. 10% down is often enough to stay "right side up", though more is still better.
Does your trade-in count?
Yes. Equity in your current car, what it's worth minus anything you still owe, works just like cash towards the down payment. In most US states it also reduces the sales tax you pay. If you owe more than it's worth, that negative equity works the other way: it gets added to your new loan.
When a smaller down payment is fine
- 0% or very low APR offers. If the interest rate is close to zero, keeping cash in a savings account can make sense, as long as you're comfortable with the negative-equity risk.
- Your emergency fund would be wiped out. Don't put your last $5,000 into a car. A car repair or job loss with no cash cushion is how people end up with high-interest debt.
- You buy GAP insurance to cover any gap between the loan and the car's value. It's often cheaper from your own insurer than from the dealer.
How to build a bigger down payment
- Save the future payment now. If you expect a $560 payment, put $560 a month aside for a few months before buying. It tests the budget and grows your deposit.
- Sell your current car privately rather than trading it in; private sales usually get more, though you lose the trade-in tax benefit in many states.
- Use the savings goal calculator to see how long it'll take: savings goal calculator.
Put it all together
A solid plan looks like: roughly 20% down (10% on used), a loan of four to five years at most, and total car costs that fit comfortably in your budget. How much car can I afford? explains the 20/4/10 rule that ties those together.
Frequently asked questions
How much should I put down on a new car?
About 20% is a common guideline for new cars, to lower payments and interest and reduce the risk of owing more than the car is worth.
How much should I put down on a used car?
At least 10% is a sensible minimum for a used car, and more if you can manage it without draining your savings.
Does a trade-in count as a down payment?
Yes. Any equity in your trade-in (its value minus what you still owe) counts towards the down payment and, in most US states, also reduces sales tax.
Is it bad to put zero down on a car?
Not always, especially with a 0% APR deal, but it raises the risk of negative equity. Consider GAP insurance and a shorter loan term if you put little down.