How much should your car down payment be?

In a nutshell

For most people, buying a car is one of the largest purchases they'll make, aside from buying a home. As with a home purchase, it makes sense to strike the best balance between a comfortable down payment and monthly loan payments.

• If you make a larger down payment, you'll avoid having a high monthly payment. A high car payment could make meeting your monthly financial obligations — including regular car maintenance — difficult.
• If you put down too much on your car, there's the opportunity cost of having less cash to save, invest or live on.

How a down payment affects your car loan

Like a home loan, car payments are amortized over time as an installment loan. This means the interest rate and monthly payment amount are fixed for the entire loan term. Loan terms can last anywhere from 12 to 60 months, although some lenders offer loans up to 84 months (or even 96 months).

When you put money down on your car purchase, you reduce the total amount of the loan. For instance, if your car costs $20,000 and you put $3,000 down, the total loan amount would be $17,000.

Essentially, the more money you put down, the less your monthly payment will be. Other factors (discussed below) will also affect your monthly payment amount.

It's also worth noting that putting more money down on your car loan increases your vehicle's equity. (Your equity equals your ownership stake.) This is important if you ever find yourself in a situation where you need to sell your car or settle an insurance claim. When your car loses value, as most do immediately after purchase, you could be upside down on your loan. (Being upside down on a loan is when you owe more money on the loan than the car is worth.)

Putting a larger down payment can help you avoid this situation. A larger down payment gives you a buffer against the rapid depreciation of your car and reduces the likelihood of being upside down on your car loan.

Should you put a down payment on your car?

This all depends on your financial situation and goals. If you are trying to preserve cash for other purposes — a down payment for a home, home renovations, a wedding or an unforeseen emergency — then putting less (or zero) money down may be helpful. In this scenario, $5,000 you don't have to put down on your car purchase is $5,000 you could use towards another purpose.

This purchasing strategy could be helpful if you have an immediate need for cash, but the math may only work for the short term. The more money you borrow for your car, the more interest you'll pay on the loan balance, which can eventually deplete you of cash.

Depending on the situation, you could spend more money over the loan term with a lower down payment. (For example, you'll pay more interest on a $20,000 car loan versus a $15,000 car loan.) As the interest rate on the loan climbs, the difference in interest payments becomes even more pronounced for different loan amounts.

If you need a large sum of cash soon, putting zero down on a car loan could work for you, though you should be prepared for a higher monthly note. If you want to avoid paying more interest on your loan, a higher down payment with a lower monthly note may be the way to go.

What other factors affect your car loan?

Your car loan is influenced by other factors, too. When lenders evaluate your credit, they will consider your credit score and payment history.

If you've got an excellent credit score, the lender will likely give you a lower interest rate (and potentially extend a car loan that won't require a substantial down payment amount). You can always choose to make a larger down payment, but it's nice to have the option to choose.

If your credit score and history aren't as good, a lender may require a larger down payment and give you a higher interest rate. In this scenario, you can always make a larger down payment, but you probably won't have the option to make a smaller down payment than the lender requests due to your credit score.

How to lower your car loan payments

If you're after lower car payments, you can accomplish this in a few ways. Choose the method that's ideal for your situation.

The first thing you can do is purchase a less expensive car. This could mean getting a basic model or a used vehicle for a lower price.

Another option is to make a larger down payment on your car loan. As mentioned above, this will give you a smaller car loan and a lower monthly payment.

If you've already got a car loan, you can refinance your car loan. This process involves paying off your current car loan and then amortizing it over a longer period, which lowers your car payment. Lending platforms — such as Refi Jet or MyAutoLoan — can connect you with lenders based on your credit profile and vehicle type.