How Much Down?

Sizing up your down payment

By BANKRATE.COM

Posted: 2008-10-31 14:19:12

We all know that a new car loses a significant amount of its value when you drive it off the lot. That's where the down payment -- the amount of cash you bring to the purchase -- comes in.

The down payment can demonstrate to a lender that you're willing to make an investment in the deal, and perhaps gain a more favorable interest rate. It also helps take some of the shock out of the instant depreciation so you're not "upside down'' on your loan for years and years.

Upside down
What's it mean to be "upside down?'' You learned in an earlier chapter that it's the industry term for a car owner who owes more on a vehicle than it's worth. Almost every new car -- and most used-cars -- transactions involve a period of being upside down on the loan. After all, if you put 10 or even 20 percent down on a car and it depreciates 25 percent in the first three months, you're upside down, at least for awhile.

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But where it gets worrisome is when the owner remains upside down three and even four years into a loan.

You've also seen earlier how some folks make matters worse by rolling the old car's remaining debt into a new loan. They're forced to pay interest and make payments on a car they don't even own anymore. And tacking the extra debt on their new auto loan puts them upside down all over again.

Up the down payment
How do you avoid that situation, aside from making the best initial purchase deal possible and not rolling your old car's loan into the deal?

Make a substantial down payment.

These days, the average down payment for an auto loan isn't much of a payment at all. A typical car buyer puts just 5 percent down. That often doesn't even cover the cost of sales tax and other fees, much less make a dent in the depreciation factor.

If at all possible, a buyer should plan on putting down at least 20 percent of the purchase price. With that much down, a buyer should begin to see positive equity about two years into a four-year loan, assuming the vehicle's kept in good shape.

If you can't put down 20 percent, scrape up as much cash as you can and keep the term of the loan as short as possible.

You can use Bankrate's auto loan calculator with amortization table to get the remaining balance at any given point. Comparing that with the estimated value of the car at the same point will tell you when you stop being "upside down" in the loan. That calculator also has an "extra payment" feature that will show you the impact it will have if you apply added sums against the principal.

For more information on this topic, visit our Car Loans center.

2006-08-18 19:52:26

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Dyana719 01:03:24 PM Oct 20 2008

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Fit with a personal good check for down payment and finance approximately 10,000 of the purchase ************ of two years (24 payments). Can I get a reasonable offer?Unfortunately, not likely.I too thaought exactly as you did and went with alarge downpayment..I.. learned the hard way , the dealership WANTS to ge you to finance and rake in the cash from high interest. I had good credit and the salesman straight ou lied and said it showed a low score(i confirmed later that he was lying, y score was great).So they will up the price, add on features you dont need. They make almost nothing with cash and i had to show 3 w-2 forms proving income. They still go through all that application process for someone paying all ******** will be a cahllenge u need tp prepare for them turning u down flat saying u have no income and trying to get u to a high interest subprime rate. Watch out. Only gp to a amjor dealership lie Ford, Honda. etc. not a private one.

JamesCCollins 11:05:09 PM Oct 18 2008

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I have found most car dealers to be greedy. Don't expect good deals. With the poor US economy they have to get more for each car they sell. They know you need a car and they have you over a barrel. You will probably end up paying as much or more for a used car than a new car becasue they will steer you into the used car deal as being the better value when it is not. Dealers are the ones cleaning up and you are taking in the backside. Don't settle for less than a new car, unless you are shopping used. Expect buying a car to be the worst day of your life and it probably will be for most. If you make a good deal, you will be able to enjoy it once you get home.

FenMazEnn 12:31:18 PM Jun 15 2008

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hi my nam is fran
i have a old car it is a 1993 is they any way that i can sell this car and the money that i get can i put it on a up to date car .if i can fime a dealer that wii take it and do you know any dealer that i can take it to i live in phila pa also why is it that you need so much money down why can you just go with a 1000.00 knowing that i have everything else like my iinsurance so why so much and if i wont to make payments on the loan of the car weeken and i tell them this so why do i have to go to so much trouble .i need a car like new and i done know where to take this car at so i can put down on a never car

Nissanpickup88 04:53:45 AM Mar 13 2008

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Only if you let the car dealer know that you can always buy some where else.New car dealers are hurting right now to sell there cars because the economy is bad,So yes they will give you a reasonable price.

AJPJJJ 02:38:23 AM Mar 02 2008

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I am 71 years old, should not have any marks against credit rating. I want to buy a Honda Fit with a personal good check for down payment and finance approximately 10,000 of the purchase ************ of two years (24 payments). Can I get a reasonable offer?

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