How Much Money Should You Put Down on a Car?

If you’re one of the many Americans looking to finance a new car rather than buy one outright with cash, you might be wondering how much money you should put down on a new car. Two popular options for acquiring a car without the cash to buy it are a loan and a lease. A loan is borrowing money to purchase a car and paying it off over time while a lease is like renting a car from a leasing company and either returning it or buying it at the end of the lease.

So, how much money should your car down payment be? Very simply: If you’re buying the car, make a down payment of as much as you can afford. If you’re leasing, put down as little money as possible in order to keep the payment reasonable.

With a lease, the down payment is often called the “capitalized cost reduction.”

It’s possible to get a car with zero money down, but most of the time, a loan or a lease requires a down payment. The bigger the down payment, the lower your monthly payment. In the case of a loan, the bigger the down payment, the closer you are to actually owning the car.

Here are a few factors to consider when deciding exactly how much money to put down on your next car.

Benefits of a down payment

Making a healthy down payment has several advantages that benefit you throughout the whole term of your loan. With a loan, the bigger the down payment as a percentage of the value of the car, the closer you are to owning the car outright, which is the most financially secure position to be in with your car — in short, you’ll be gaining equity in the car. For example, if you make a 20 percent down payment rather than a 5 percent down payment, you’ve offset more of the depreciation hit, you’ve lowered your monthly payment, and you can probably afford to have a shorter term on your loan meaning you’ll own your car sooner and you’ll pay less in interest no matter what rate you negotiated.

In the case of a lease, automakers will often run different lease deals on the exact same car with different monthly payments based on the amount of cash you can put down at signing. For example, a well-qualified lessee could lease a 2020 Toyota RAV4 LE with no money down and make a $320 monthly payment or you could lease that exact same car for the same amount of time for $239 per month if you make a down payment of $2,699. Those are pretty significant monthly savings as a reward for scraping up some cash for a down payment. However, you will never get that money back since you have no equity in the car. If the car is wrecked or stolen, you may also be out of luck when it comes to your lease down payment.

To put it simply, the more money you put down upfront, the less money you borrow and borrowing less money is always better than borrowing more money.

How much should I put down?

A good rule of thumb for a down payment on a car loan is 20 percent of the purchase price. A down payment of 20 percent or more is a good way to avoid being “upside-down” on your car loan (owing more on the car than it’s worth).

For new car leases, the required initial payment, or cash due at signing, is typically predetermined. There usually isn’t a lot of flexibility on how much cash you can put down on a lease so it’s a good idea to go with the aforementioned predetermined amounts. For the reasons we mentioned before, it’s still a good idea to pay as little up front as possible while keeping the monthly payment affordable given your income.

As for used car loans, you can usually get away with a lower down payment than you could on a new car. That’s because a used car has already gone through some depreciation. Part of the point of a down payment on a new car is to offset initial depreciation, which isn’t as much of an issue with a used car. That said, it’s still a good rule of thumb to put down at least 20 percent on a used car.

Use your trade-in and rebates to boost your down payment

Buyers don’t necessarily need to make their whole down payment with cash. There are several acceptable forms of down payment for a car other than cash, and one of them is the car you’re already driving. If a dealer takes a vehicle on trade, the value that the vehicle’s owner and the dealer agree upon is deducted directly from the purchase price of the vehicle. That’s true for new and used car loans as well as new car leases.

To get an idea of the value of your trade-in, check out Kelley Blue Book to get an estimate on the trade-in value of your specific car. Just remember, your trade-in value will always be less than what you can get from a private party sale. If you’d rather get more money for your car than what a dealer will offer you, you can sell it yourself here on Autotrader. Otherwise, you can get an instant cash offer so you can know right away exactly how much fuel you can add to your down payment with your existing car. Keep in mind, that little bit of extra cash you get from selling the car yourself isn’t free. You will have to spend time and maybe a little of your own money preparing and selling your car.

Another alternative to cash that can help get your down payment up to at least 20 percent is to utilize rebates. Dealers and automakers often offer rebates when you finance a new vehicle through the financial arm of the brand you’re buying from. You can use rebates to your advantage to either use less cash in your down payment or boost your down payment to give you a lower monthly payment.

Bottom line

Financing a new or used car with an auto loan with a reasonable interest rate is a good way to get safe and reliable modern transportation without having to squirrel away money for years in preparation. Just be sure to have at least 20 percent of the purchase price — including any trade or rebate — to get the best deal. A new car lease typically requires less cash down and lower monthly payments than a loan for the same vehicle. The downside, of course, is no ownership of the vehicle at the end of the term and whatever money you put down will be gone.

Do a little homework before going to the dealership. Know the fair market value of the car you have your eye on, the value of any rebates or trade-ins, and how much cash you can afford to put down. From there, you can ask for a quote on a lease or loan or seek financing from an outside institution so you can get the keys to your new ride.