Calculate a Down Payment for a Car

Buying a car can be daunting, with the moving parts of finding a car you like, securing financing, and getting rid of your old vehicle if you have one. Knowing how much a down payment for a car you are interested in is a key element of decision making when you are on the market for a new automobile.

Steps

Borrowing from a Dealer

1. Consider your options. Dealerships make money by offering higher interest loans than other financial institutions. Because of that, you should know ahead of time how much you are willing to spend, and stick to that. Generally, if you have a credit score above 650, you should be able to get financing through a bank or credit union for a much better interest rate than at a dealership.
2. Decide how much you can afford to pay as a down payment. Most analysts recommend putting at least 20% down on your car, although the average down payment in recent years has been only 12%. The danger of putting less than 20% down is that your car may lose resale value faster than you pay off your loan, leaving you “upside down” or unable to pay off your loan by selling the car.
   • Unless you have practice investing, it is generally smarter to pay for as much of your car as possible up front rather than investing in savings and using the earnings to make monthly car payments. The interest cost on the car loan is generally higher than you can expect to earn on a short-term investments. However, the new zero interest loans might make sense if the price of the car is as low as it would be paying cash.
   • If you do decide to pay less of a down payment than you can afford, paying at least 20% of the car's cost as a down payment will increase the chances that your car retains its value above the amount outstanding in your loan.
3. Calculate your monthly payment budget. How much can you afford to spend on your car payment each month? And for how long?
   • Consider the type of car you will be buying and how long you will drive it as well, when thinking about the life of your loan.
4. Shop beforehand. Use online resources to look at the cars for sale in your area. Use Kelly Blue Book or Edmunds to find the fair value of the car before going to the dealership. Make a list of a few cars at different dealerships you would be interested in.
   • If you want to trade in your current car, look at the fair value of it using one of the same tools. Most car value calculators include an option to calculate the trade-in value of the car.
   • Consider buying a used car. New cars are the most expensive and lose their value a lot faster than used cars. You can buy a one- to three-year-old car and save thousands off the price you would pay for a brand new one.
5. Go to the dealer. Once you have an idea of what you want and what you can afford, go look at the cars you wrote down on your list. Test drive them, and if you like one, make an offer. Start by offering less than the fair value for the car based on your research. If the dealer rejects your offer, leave the lot. You can come back later if you want, but physically leaving will signal that you are serious about looking for a bargain.
   • Don’t be persuaded to test drive a car you didn’t come to look at. Because they are paid on commission, dealers will want you to buy as expensive a car as possible, regardless of your financial position. Make clear that you came to see only a specific car or type of car, and that you won’t stray from that price range.
   • Don’t tell the dealer about a car you are planning to trade in until after you have made a deal. This will ensure you get the best offer possible from the dealer before offering to trade in your car.
6. Accept an offer. When you’ve found a car you like for a price that seems right, accept the offer. Then you can negotiate the type of financing you will get. You will have to apply for a loan through the dealership, so they will likely want to see your recent pay stubs as proof of income, as well as identification.
7. Negotiate your auto loan. This is where your down payment comes in — the more you are able to pay in down payment, the less you have to borrow from the dealership. The dealer may try to convince you to borrow everything from them — that’s because they earn interest on the money you borrow. This is also when you should notify the dealer if you are interested in trading in a vehicle.
   • Think about how long you realistically plan to drive this car as you determine the life of the loan. A dealer will try to entice you with very low monthly payments, but beware as this tactic will keep you making monthly payments for years to come.
   • If possible, try to get a loan for three years or less. A shorter term with a higher monthly payment will save you a lot of money in total rather than making low monthly payments for a very long time.
8. Buy auto insurance. Dealers will be more open to financing a car with a salvaged title, but you will still need to get insurance on the vehicle you purchase. If you have pre-existing insurance, you can likely call your agent and add your new vehicle.

Borrowing from a Bank or Credit Union

1. Plan ahead. The first thing you should do when you decide to buy a car is decide how much you can afford to pay upfront, and how much of a monthly payment you can afford. You should also consider the costs of borrowing to buy a car, as you will pay interest on your auto loan. Decide how long you are willing to make payments and whether the cost of borrowing is worth it.
   • Use online tools like Kelly Blue Book or Edmunds to research different cars and price ranges. This way you can get an idea of what you want without having a salesperson pressuring you.
   • Decide whether you are willing to purchase a used car. Used cars generally offer a lot more value than new ones, as new cars lose about 10% of their resale value as soon as they leave the lot, and about 20% of their resale value within the first year.
2. Go to the bank. Before you start shopping for your car, you should go to the bank and get pre-approved for an auto loan. Banks generally offer much lower interest rates on auto loans than dealerships do. Take a copy of your two most recent paychecks, which the bank will want to review as proof of income. Ask about getting an auto loan. The bank will take your information and tell you what amount, if any, you are approved to borrow. At this point, you still need to go shop for a car, so you won’t enter the loan until you choose one and allow the bank to inspect it.
   • Credit unions also offer auto loans at competitive rates. You should start with whatever institution you already have accounts with, as these are the most likely to offer you a good interest rate.
   • Remember that the amount you are approved for is the maximum you can borrow, so you shouldn’t automatically take the whole thing! Instead, ask the bank to give you payment quotes on different amounts and time periods, and think back to the budgeting you did before.
   • You may also ask about the cost of an unsecured loan from the bank. On a normal auto loan, the bank holds the title to the car, and you make payments to them until the balance is completely paid. Then the title is passed to you. An unsecured loan means that the bank loans you money without securing collateral. If you are only borrowing a few thousand dollars, the interest rate on the unsecured loan may not be much higher, and you will hold the car title outright.
3. Consider insurance. If you are borrowing money for a car from your bank, you need to plan to get comprehensive insurance to protect your car from damage while the bank owns the title. (If you take out an unsecured loan this won’t apply.) Make sure you count the cost of insurance in your calculation.
   • Most banks won’t finance the purchase of a car that has a salvaged title. Salvaged means the car has been totaled in the past, so that the damage to the car would cost more to repair than the value of the car itself. Insurance companies won’t insure salvaged vehicles with comprehensive insurance, which most banks require to secure an auto loan.
   • If you already have a car under an insurance policy, you can call your insurance company and ask what the cost of adding specific vehicles would be.
4. Make a budget. Once you know what amount you are approved for, you can add whatever money you are able to pay as a down payment, and the total is how much you can spend on a car. You should consider spending less, just because the more you borrow from the bank, the more interest you will pay.
   • For example, say you are approved at the bank for an auto loan up to $10,000, and you have $5,000 in cash to put towards a car. You could combine the two and buy a car worth $15,000, or you could use less than the bank offered and buy a $12,000 car, with $5,000 of your own money and $7,000 in borrowed funds from the bank.
5. Shop for a car. Using the price range you’ve established, start shopping! You can shop for a car either at a dealership or from individual owners selling their own cars, and modern tools like Craigslist and Cars.com will allow you to search vehicles for sale in your area without leaving home. Make a list of three or four cars you’re interested in, and go look at each before making a decision.
   • Generally, you will pay more for a vehicle at a dealership than from a private party. Many dealerships will let you trade in your old car for credit against the new one, but they might be less likely to negotiate the price of the car. You may be better off selling the car separately, either privately or to CarMax.
   • If you go to a dealership, stick to your budget. Dealers usually are paid by commission, so they want you to buy the most expensive car on the lot. By knowing ahead of time how much you are willing to spend and what you’re interested in, you can avoid some of this nonsense and start by test driving the car you researched.
6. Negotiate. Especially at dealerships, prices are always negotiable. Use the fact that you know your budget and have other options to your advantage and negotiate the price you pay for the car. Remember what amount of money you were approved for at the bank, and only accept an offer that is reasonable and within your budget.
   • You know the fair value of the car based on your research, so offer slightly less than that for the car. If the dealer rejects your offer, leave and go look at the next car on your list. The dealer will likely make you a counteroffer that you can come back to, but by walking off the lot you show that you’re serious about finding a bargain. Often as you are leaving the dealer will offer to sell at your suggested price.
   • If you’re getting rid of your old car, a dealership might also offer you the trade in value of your car. Generally this is less than what you can get by selling the car yourself, but some people prefer to trade in vehicles simply because of the convenience. If you do trade in your car, don’t tell the dealer about it until after you have negotiated a final price for the car, so that you get the most value for each individual vehicle.
   • However, you also don't want to lie, so you can mention you may want to trade-in, but tell the dealer, "We can talk about that later. Right now let's focus on the cost of the new car."
7. Make your purchase. When a dealer or private party has accepted your offer, it’s time to go back to the bank. The bank will want to inspect the car, review the title, and look up the vehicle history. Once the inspection is complete the bank will complete your loan and take the title of the car.
   • You will either have to get insurance before the loan is closed, or right away afterwards. The bank will require you to list them as a part-owner in the automobile, so if you are in an accident that damages the car, they maintain collateral.

Related Articles

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• Buy a Car With No Money Down and Bad Credit
• Calculate Total Interest Paid on a Car Loan
• Calculate an Amount to Be Financed

Sources and Citations

See also

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