A down payment can change your monthly car payment rates. In a nutshell, the larger your down payment, the smaller the amount of money you need to borrow will be. Since your monthly payments are determined by dividing the loan amount (and calculated interest) by the length of the loan, each payment will end up being lower.

Interest is entirely based on the loan amount and your approved rate, meaning the loan will accrue less interest if you borrow less. A smaller loan amount also means less risk for the lender, so they may be willing to offer a better rate.

Not only will a large down payment save you money in the long run, but you’ll also gain more equity in your car, which can be helpful if you choose to sell or trade in your vehicle (especially if you do so before the end of your loan).

How Much Should I Put Down on a Car?

There is no clear-cut answer to this question. The amount you should put down on a car depends on your budget and the purchase price of the vehicle you’re buying.

However, as a rule of thumb, it’s recommended to put down at least 20 percent of the purchase price. This will help lower your monthly payments and may even enable you to qualify for a better interest rate. For example, if you’re approved for a $20,000 loan, your down payment should be $4,000. You can pay your down payment with cash, debit card or credit card, by trading in your old vehicle or some combination of those options.

Why Should I Put Money Down on My Car?

Sometimes buyers are hesitant to put their hard-earned savings toward a down payment for a new vehicle. Many people like the idea of having an emergency fund for a rainy day, but there are actually several long-term benefits to making a down payment:

• Lower monthly payments: Putting money down on a car will reduce the amount of your monthly payments, making them more affordable and allowing you to put more of your income toward savings.

• Lower interest rate: By putting money down on a car, you can often qualify for a lower interest rate, which will reduce the amount you need to pay back by the end of the loan.

• Less depreciation: Putting money down on a car gives you instant equity in the vehicle--if you ever need to sell it or trade it in, you will have more value to work with.

• Lower insurance costs: Many insurance companies offer discounts for drivers who pay larger down payments, so putting money down on a car is another way to help reduce your monthly costs.

Can I Buy a Car with No Money Down?

If you cannot afford or would rather not put money down on a car, some dealership will still technically allow you to purchase one without a down payment. However, this depends on the dealership and the type of financing you are looking for. Some dealerships may require a down payment, while others may not. It’s always best to speak with the dealership directly to find out what their requirements are.

If you buy a vehicle without a down payment, it’s a good idea to protect your finances by following these tips:

• Buy an inexpensive vehicle: It can be tempting to purchase a brand-new or extravagant car, but if you cannot afford a down payment, it’s probably wisest to keep your payments low by purchasing a less expensive pre-owned car.

• Purchase gap insurance: This type of auto insurance coverage helps cover the difference between the amount you owe on your car loan and the actual cash value of your vehicle if it’s totaled or stolen.

• Consider getting a cosigner: If your credit is less-than-stellar, consider having someone cosign your loan to qualify for a lower interest rate (this can save you money as you’re paying off the loan)

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