How Much Down Payment Do You Need to Buy a Used Car?

The Instamotor Team

Not your typical used car salesman. Our team is here to provide honest and transparent advice about car buying and selling.

You may think that the only way you can purchase a used car is to have cold hard cash up front. You know the stuff—green, paper, usually smells kind of funny? Well, we here at Instamotor have news for you—you can actually finance a used car and save big.

There are a number of steps you can follow to ensure that you get the best deal on your dream new-to-you car. We’ve outlined a few here, for you. Once you’ve found your perfect car, done your homework on it, pulled the vehicle history report, taken it for a test drive, had it checked out by a certified mechanic, and made and had an offer accepted by the seller, you should be ready to head to your financial institution of choice and get a loan, right? Sort of.

Financing Your Used Car

First, you need to figure out the best place to finance your used car loan. There are a variety of options out there for car loans and depending on a number of factors some may offer better deals than others. If you have not-so-stellar credit, start with the basics. Do your best to clean it up before you begin the application process and be sure to shop around. What may put you in a subprime loan in the mortgage market might not put you in a subprime loan in the automotive loan market.

Also, ensure that your new-to-you car is less than 7 years old. Most major institutions won’t provide financing for a car that is older than that. In some rare cases, though they may make exceptions for cars that qualify as historic or investment cars. In that case, you’ll need to do a lot more paperwork and legwork to get a bank or financial institution to loan you the money.

Picking the Right Lender

Next you need to decide between going to a big bank or trying a local credit union. Your personal credit situation and how much money you have in an account with a bank can impact what kind of rates you get. Do as much homework as you can before you apply, too. Each time you apply for a loan, your credit takes a hit. Here’s how you can protect your credit when you are shopping for a loan. You can also apply for a private party loan if you are so inclined. Private party loans often charge a higher interest rate than a common bank loan, so be aware. They are however slightly easier to get if you have no-so-perfect credit. For more on private party loans, check out our story, here.

Once you’ve figured out where you finance, you can start coming up with the amount you want to put into the down payment. The type of financing you decide to go with will determine how much money you’ll need to put down on your new-to-you car. In 2015 Edmunds did a survey and found that people were putting down less than the usually recommended 20% on both new and used cars. The reason for this was because the average cost of a vehicle has gone up over time and people are increasingly less able to make the larger down payment.

Shopping for a loan

That being said, you also need to know what you’re giving up by investing more cold hard cash in your used car. As Autobytel points out, if you’re looking at a loan rate of 4% but know that you can invest that cash elsewhere and get a 7% return, you would be better off putting down as little as possible and investing the rest. The interest rate is dependent on where you decide to finance and what your credit rating is, which is why it’s crucial to do your financial legwork before you settle on a specific loan.

Also, it’s important to know that certain loans require a certain percentage of down payment. When you are shopping for a loan, be sure to ask the loan officer or read the fine print to know exactly what it is you will need to come up with to get the loan and the rate you want. If you put down less you’ll likely end up with a higher interest rate and sometimes vice-versa. Just be sure you know what it is you are signing up for when you go to secure financing for that new to you car.

The other thing to consider when getting ready to finance your used car is to be sure that you won’t be upside down once you buy it. Many times when you purchase a new car, the moment you drive off the lot, you’ll end up owing more than what the car is worth. To avoid this situation you’ll need to put more money down. In the case of a used car, it’s less likely that you will end up upside down (as long as you did your homework and got a good deal) but more likely that your monthly payment will be determined by how much you put down. The more you put down the less your monthly payment will end up being.

So what’s the right amount to put down?

It’s possible to put down as little as 0% if you want or need to but you must have pristine credit. Most financial institutions won’t loan you anything without a commitment from you. If they do let you put 0% down on a new to you car, then you’ll likely end up paying more in interest. So it is a trade off. The more you can put down the less you will have to finance. In general you will also run a greater chance of being upside down in the car if you put 0% down and you’ll be taking on more debt.

At the opposite end of the spectrum, if you wanted to you could put as much as 50% of the price of a used car down and reduce your payments and your interest rate. The negative in this case is that you are tying up a lot more of the cold hard stuff in a single asset and generally you can find other, better ways to convert that cash into more money down the road.

All this being said, a good general rule of thumb is to try to get as close to 20% down together for your down payment on a new or used car. You can find a great down payment calculator over at Bankrate or visit us here at Instamotor to find out more about financing and what you may need to get your perfect dream car. The Bankrate calculator offers an opportunity to find out what you could earn if you put more of that down payment into another investment, too.