To go big or not to go big, that is the question. By today’s standard, what’s big? Many experts would say a sizable down payment is between 10% and 20%, or more. In a world where the average new car costs about $35,000 that means your down payment is between $3,500 and $7,000. Now, you have to ask yourself why are you putting money down.
The answer to the size of down payment question depends on three factors:
1. Your ability to come up with a large amount of cash
2. Your wiliness to part with the cash
3. The banks requirement of you based on your credit situation
Just because you have the cash, it does not mean that you have to drop a big down payment on your next new car. If the bank has not required it, what’s your real goal? For many the goal is to lower their monthly payment. That’s a pretty good goal. But, this approach is not a one size fits all solution. If you are really concerned about balancing your monthly budget, a big down payment may be right for you. However, if you are a preferred credit worthy customer and you are eligible for the many low to zero percent interest rate auto loans you may be losing money. Are you better off making money on your money in the stock market, with a CD, or some other financial vehicle? Maybe you need the cash for a rainy day fund. Even with an umbrella, we all get wet at some point.
The point here is this, if the bank is giving you free money (interest free), why not take it? Here’s some examples:
- $35,000 loan with no money down at 0% interest carries a monthly payment of $583.33
- $35,000 loan with no money down at 0% interest with a down payment of $3,500 carries a monthly payment of $525.00 a difference of just 58.33
- $35,000 loan with no money down at 0% interest with a down payment of $7,000 carries a monthly payment of $466.67 a difference of just 116.66
You do the math and decide if you want to stay liquid or make a marginal change in your monthly payment. However, if you are someone with less than perfect credit the math works out differently. Let’s say you have a high interest rate loan @ 12%. Here’s how the math works (all payments are based on a 60 month loan)
- $35,000 loan with no money down at 12% interest carries a monthly payment of $778.56.
- $35,000 loan at 12% interest with a down payment of $3,500 carries a monthly payment of $700.70 a difference of $77.86.
- $35,000 loan at 12% interest with a down payment of $7,000 carries a monthly payment of $622.84 a difference of just 155.72.
So, what should you take from all of this math? If you have a high intrest rate loan, a down payment has bigger impact on your monthly payment and your total spend. In the last example of a 12% loan with a $7000 down payment you cut your total payments by over $9000 over the life of the loan. So, you come out ahead. The only question is will you need that cash for something else in the future. Your individual financial situation and your need for cash will drive your final decision. When in doubt, you can always as your financial adviser. After all, for many of us buying a car is our largest single purchase after a home purchase.
Our simple answer to the question of should you put a big down payment down on your next new car is… it depends. Take your time and meet with you financial adviser and make the best decision for you. If you don’t have one, maybe you should get one, especially if you have over $10,000 in cash just sitting in your bank or under your mattress. Buying a car is not just a transportation decision; it’s also a financial decision. Choose wisely…