How Much Money Should You Put Down on a Car?

If you need to buy a new or used car or plan to lease one, you might wonder how much money do you need for a down payment.

When you take out a loan, you borrow the money to pay off an automobile over time. A lease works more like renting a car from a leasing company. A down payment on a vehicle is somewhat irrelevant when you must return or buy the car at the end of the lease term.

We’ll tell you about the benefits of putting money down on a car, how to use a car trade-in as a down payment, why less is more when putting money down on a vehicle lease, and more.

How Much Should a Down Payment on a Car Be?

So, how much should you spend for a down payment on a car? It depends. When financing a vehicle with a loan, make as much of a down payment as you can afford. However, when leasing a car, you will not get your down payment back at the end of the lease. Therefore, you should put as little money down as possible.

Getting a car with zero money down is possible, but loans and leases typically require down payments — the bigger the down payment, the lower your monthly payment. The bigger the down payment, the closer you are to owning the car with a loan.

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

• Benefits of a Down Payment 
• Down Payment Rules to Live By
• Using Your Trade-in as a Down Payment
• Using Rebates to Boost Down Payment

Benefits of a Down Payment

Making a healthy down payment has several advantages that benefit you throughout the whole term of your loan.

The bigger the down payment, the closer you are to owning the vehicle outright with a loan. Owning the pink slip, or certificate of title for the car, is the most financially secure position to be in with your vehicle.

In short, you’ll be gaining equity in the vehicle. If you make a 20% down payment rather than a 5% down payment, you’ve offset more of the car depreciation hit. You’ve also lowered your monthly car payment, and you can probably afford to have a shorter term on your loan. You’ll pay less in interest no matter what rate you negotiate. So with a loan, the more you put down, the faster you will own your car.

RELATED STORIES: Car Payment Guide: Calculating What You Can Afford

In the case of a lease, automakers typically run lease deals with various monthly payments based on the down payment amount. For example, a well-qualified customer could lease a 2022 Hyundai Tucson with $3,699 down for a $219 monthly payment for 36 months at the time of this writing. If the same car manufacturer provided a no-money-down offer, your payments would significantly increase. Use our car leasing calculator to find out what you can afford.

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. The same is true if the vehicle is in a wreck or stolen.

RELATED STORIES: Car Finance 101: Everything You Need to Know

Down Payment Rules to Live By

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

Dealerships typically predetermine a required initial payment for new car leases or a cash amount due at signing. There usually isn’t a lot of flexibility on how much money you can put down on a lease. Therefore, it’s a good idea to go with predetermined amounts. It’s generally wise to pay as little upfront as possible while keeping the monthly payment affordable for 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 vehicle is to offset initial depreciation. That point 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% on a used car.

Using Your Trade-in as a Down Payment

Buyers don’t necessarily need to make their entire down payment with cash. There are several acceptable forms of a down payment for a car other than cash, and one of them is to trade in the vehicle you’re already driving. The new car purchase price is lower based on your trade-in value. Trade-in value applies to both new and used car loans and new car leases.

To get an idea of the value of your trade-in, check out our sister site Kelley Blue Book to get an estimate on the trade-in value of your specific car. Just remember, your trade-in value at a dealership will always be less than what you can get from a private party sale. If you’d prefer to 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 with no obligation from dealerships that come to you with offers. That way, you can know right away exactly how much you can add to your down payment with your existing car.

Remember, that little bit of extra cash you get from selling the vehicle yourself isn’t free. You will have to spend time and maybe a little of your own money preparing and selling your car.

Using Rebates to Boost Down Payment

Another cash alternative is to use rebates. Rebates can help get your down payment up to at least 20% is to use rebates. Dealers and automakers often offer rebates when you apply for loans from the financial arm of the brand. You can use rebates to your advantage to either make a smaller down payment or increase the down payment to lower your monthly loan bill.

While the chip shortage means fewer rebates will be available, you can still look for those offers.

The Bottom Line of Down Payments

An excellent way to get safe and reliable modern transportation without having to squirrel away money for years is to finance a new or used car with an auto loan at a reasonable interest rate. Just be sure to have at least 20% of the purchase price — including any trade or rebate.

On the other hand, a new car lease typically requires less upfront cash and produces lower monthly payments than a loan for the exact vehicle. Knowing that there is no return on your down payment and no car ownership at the end of the term are the two most significant downsides of leasing.

RELATED STORIES: Car Payment Guide: Calculating What You Can Afford

Do a little homework before going to the dealership:

• Know the fair market value of the car you have your eye on.
• Consider the value of any rebates or trade-ins.
• Evaluate how much cash you can comfortably afford to put down.

From there, you can ask the dealership 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.

Related Car Financing Articles:

• Car Finance 101: Everything You Need to Know
• How Do You Finance a Car That’s More Than 10 Years Old?
• Leasing a Car: When is Leasing a Car a Good Idea? 

Editor’s Note: This article has been updated for accuracy since its original publish date.