As you begin your car buying adventure, a lot of questions are likely to loom in your mind—everything from “Should I buy a convertible?” to “Should I get pre-approved for a loan?”
It’s the financial aspect of buying a new-to-you vehicle that can often stress folks out. In particular, it can be challenging to figure out how much you should pay when making a down payment.
The down payment is designed to give the lending institution enough initial capital to make the loan. It also allows them to recoup at least a portion of the loan amount, in case of default.
Generally-speaking, your down payment should be around 20% of the loan amount. So if your loan is for $20,000 then you would want to pay around $4,000 down.
From your perspective, a down payment can be extremely helpful. It can be nice to take care of a significant chunk of your loan right off the bat.
The down payment can also help protect you against being upside-down in your loan if you decide to buy a new vehicle. That comes from the difference in how much you owe and how your new vehicle is actually worth during the first year or two of your loan. Vehicles depreciate quickly than you can pay down your loan, so for a time, you owe more than it’s worth. A large enough down payment can ensure that this doesn’t happen.