How much should a car down payment be?

There is a conventional answer to this question, which is 20 percent down on a new car and 10 percent on a used one. It is a reasonable answer. It is also almost always justified with the wrong reason, which is that it lowers your payment. It does lower your payment, by less than people expect, and that is the smaller half of what it does.

What a down payment actually buys

Look at the two halves of that card separately. Putting $7,000 down on a $35,000 car moves the payment from $694 to $571: about $123 a month, for $7,000 of your money up front. On its own that is not a compelling trade, and if the payment were the only thing being bought, the honest advice would be to keep the cash.

The bottom three rows are the actual argument. With nothing down, that buyer is upside down for years and goes $6,220 underwater at the worst point. With 20 percent down they are barely underwater at all, $167 at the deepest, and they cross into positive equity 32 months earlier. That is what the money bought: not a cheaper car, but a shorter stretch of being unable to sell, trade or write off the car without finding cash from somewhere.

That is the same arithmetic that makes a long term expensive in a way the payment hides, and it is why the two questions belong together. The negative equity calculator runs your own price, term and deposit and shows the month the two lines cross.

When the dealer says a down payment is required

Here is a real pattern from the reviews in our research. A buyer is told the deal cannot be approved without $10,000 down. The buyer declines and moves to leave. The deal is approved on $4,500, in the same conversation, on the same credit file.

Nothing had changed about the risk. What changed was the sale. A required down payment is sometimes a genuine lender condition, particularly on a thin or damaged credit file, and it is sometimes a number chosen by the person selling you the car. The two look identical from your side of the desk, and there is a way to tell them apart.

• Ask which lender is requiring it, and to see the condition. A real underwriting condition comes from a named lender and can be shown to you. A negotiating position cannot.
• Keep the deposit out of the payment conversation. The finance office would rather discuss a monthly figure than a purchase price, because a deposit can be presented as the thing that makes an unaffordable payment affordable. Settle the price of the car first, in full, before any deposit is discussed.
• Be genuinely willing to leave. It is the only leverage in the room, and in the mined case it was worth $5,500 in about five minutes.
• Never borrow the down payment. A cash advance or a personal loan taken to fund a deposit is a second, more expensive debt on a depreciating asset, and it undoes the one thing the deposit was for.

Zero down, and when it is defensible

Nothing-down financing is normal, widely offered, and not automatically a mistake. What it does is specific and worth naming: every dollar of price, tax and fees goes into the loan, so the balance starts at its maximum and the period of owing more than the car is worth starts at its longest. On the example above that is the difference between crossing into positive equity in the third year and crossing it almost immediately.

The cases where nothing down is a reasonable choice are real ones. A manufacturer subvented rate below what your money could otherwise earn or repay. Cash you genuinely need as an emergency fund, which is worth more to you than a shorter underwater stretch. Higher-rate debt that the same money should be retiring first. What makes it defensible in all three is that you chose it knowing what the second column costs.

Two mechanics to keep straight while you decide. A trade-in with equity in it works exactly like cash down and reduces the taxable difference at a dealer as well. A trade-in you still owe money on works the opposite way: the shortfall gets added to the new loan, which is a negative down payment however it is described on the form. The long-term loan guide works that rollover through, because it is where the two mistakes compound.

The practical target, then. Put down what closes the day-one gap, which is roughly the tax and fees plus the first year of depreciation, and on most new cars that lands near 20 percent. Put down less if the cash is doing more useful work elsewhere. Do not put down more than you can afford to be without, because a deposit that empties your emergency fund gets borrowed back at a worse rate the first time something breaks.