As a general rule, it’s normal to try to pull together about 20% of the asking price of the car that you’re going for. But in today’s financial climate there are no hard and fast rules on how much money you need for a car down payment, so prepare to be flexible in your planning. The most important thing is to do just that – planning. You need to know not only how much cash you have available now, but also how much you’ll be able to afford for your regular payments. The former will affect the latter, so it’s important to plan this just as carefully.
[Read: Is It Possible To Buy A Home Without Down Payment?]
What Affects Your Down Payment?
Deciding how much money to put forward as a down payment on a car depends on a number of factors – not just how many dollars are in the bank! You need to consider:
- Which car you want
- Your credit score
- Which loans are available to you
The first point is pretty obvious – although you may have a dream car in mind, once you’ve worked out your monthly or weekly budget you’ll know what sort of price range to look at. Don’t try to stretch your finances too much or work on a ‘best case scenario’. Also, don’t fall into the trap of thinking that just because you can pay a 20% deposit on a car you’ll be able to afford it. Remember, a 20% deposit on a cheaper car means that you’ll have less to pay in the long run to pay off your loan completely. It’s important not only to consider how much money you need for a down payment but also how much money you can afford each month.
You may not have considered the other two points. Let’s look at them in a little more detail.
Your Credit Score
Only the very lucky can afford to pay for a car in total without taking out some sort of financial plan. So it’s a good idea to know where you stand before you apply for a loan. Experts such as Experian say that you should keep a check on your credit score about once a year, and when you’re deciding on how much you need for a down payment it’s important that you know how strong you are financially.
You may always pay your bills on time, but that doesn’t necessarily mean that you’ve got a great credit or FICO score. There are numerous factors that affect your credit rating, and buying a credit report will help you see where you can improve. There are some simple steps you can take to improve your credit rating, such as moving your credit card balances so that they’re all below 30% of your credit card limit, transferring debt into a personal instalment loan and asking for a credit increase to increase your debt-to-credit ration. Once you’re happy with your financial situation, you have a clearer idea on how much money you should use as a down payment on a car. For example, you may be able to afford a 50% deposit, but if you’re offered a great low rate on a loan you may find that you can put down a smaller down payment and still comfortably afford the loan’s repayments. You can use websites such as Experian.com or Annualcreditreport.com, or ask your credit card provider to see if they can give you a FICO score.
Once you’ve got a good idea of the car you want and what your financial position is, you can move forward to look at the different loans that are available to you. This will in turn affect how much money you need for a down payment.
Firstly, check with your bank or credit union to see what car loans they have on offer. Compare several places before heading to the dealership to see what they offer you. This way, you’ll be confident in knowing whether or not you’re getting a good deal. As a general rule of thumb, look for a loan with an interest rate of less than 7%. Of course, loans’ interest rates change all the time depending on the financial climate, so if it seems that you can’t get a low rate you’ll have to consider either waiting a while or saving up a little more money for the down payment for your car.
[Read: Tips To Avoid the Risks of Debt Consolidation Loans]
There are hundreds of different cars to fit hundreds of different customers. So it’s logical that there are a multitude of different options when deciding how much money you need for a down payment on a car. Going with the general consensus that a 20% deposit is needed is a good starting point, but make sure that you look at the different factors that affect your purchase too. Remember, it’s a big commitment, so make sure that it fits into your life, not just the general rule.