The estimated average new car price in America was $34,264 in July 2016, and has steadily risen, according to Kelley Blue Book. Because the typical car down payment advice is to put down 10% to 20% of the loan amount ($3,426.40 to $6,853.80 for the average new car price above), you might be wondering how much money you really need or how little you can get away with for the down payment.
The Impact of Your Credit Scores
The first step you should consider is checking your credit, as this is a major influencer on the rates you’ll qualify for when you apply for an auto loan. You can see two of your credit scores for free, updated every 14 days, on Credit.com.
According to a Q1 2016 Experian report, a credit score of 661 or higher represents “good” or “prime” credit for an auto loan, which will get you a decent rate. Lower than that and your lender may require a larger down payment. (But there are auto loans for people with bad credit, so don’t let that discourage you.)
A less expensive car will generally result in easier loan approval for lower credit scores, according to Experian’s analysis. Beyond that, buying a car at a lower price typically requires a lower down payment. Edmunds research suggests a new car loses 20% to 35% of its value in the first two years. Because used car prices have already taken that depreciation into account, the price is also reduced.
“As the price gap to late-model used cars increases, more shoppers may turn to the pre-owned market for their next vehicle,” Tim Fleming, analyst for Kelley Blue Book, said in a press release.
Additionally, legitimate used car dealerships may offer rebates you can apply for as well as a trade-in price for your existing vehicle which can further reduce a car’s sales price.
Your Other Options
For those who may have a hard time saving, you may consider services such as down payment layaway to help you buy a car. Still, the Center for Responsible Lending advises you watch out for car sales ads promising to qualify anyone with no down payment regardless of their credit. This may trap you in a higher interest, longer-term car loan than what a bank or credit union may offer.
Even with “good” credit for an auto loan, deemed to be above 661, you may still not qualify for those true advertised 0% interest, no down payment car loans that are reserved for those with the highest credit scores. The higher the credit score, the more choice you have about how much of a down payment you want to make.
When purchasing a higher-priced new car, a bigger down payment may help you avoid the gap between what you paid for the car and the current value of the car once you own it, according to Edmunds.
What if My Credit Isn’t Great Yet?
As you see, your credit scores really play a major factor in the amount you must put down for an auto loan. If your scores are not quite where you’d like them to be, consider working to improve them before applying for the loan. You can do this by paying down debts, disputing any errors you discover on your credit reports (which you can learn about how to do here) or limiting the number of new credit inquiries until your score rebounds.