If you plan to finance a car and have been doing your research, you know you must make a down payment. But do you know just how much you should put down? Read on to know how much down payment you should prepare.
The Rule of Thumb
The ideal down payment is 20 percent. Experts recommend paying 20 percent in advance to pay less in interest and avoid being upside down. Without a generous down payment, the car buyer will owe more than the vehicle is worth. Cars depreciate fast—their values can drop as much as 20 percent after the first year of ownership. If the car’s value is less than the existing balance and the owner needs to buy another vehicle, the balance is usually rolled into the new loan. When this happens, the cycle of car debt begins.
20 percent is deemed a good figure as it is enough to cover the first-year depreciation cost and it offers enough equity. With a 20 percent down payment, you are less likely to owe anything on the vehicle if it is totaled or stolen, or when you finally need another ride.
Less than 20
20 percent may be the suggested down payment, but not all car buyers follow the suggestion. As an Edmunds.com analysis has proven, car buyers in the U.S. pay less than the recommended amount. The average car down payment in the past year was estimated at 12 percent. Surprisingly, this is a comparatively high number. In 2005, the average down payment was 9.9 percent.
There are reasons why consumers pay less than what is recommended. The main thing to be considered are the current prices of vehicles—the costs of automobiles has consistently increased over the years. Unfortunately, salaries have remained steady. It can be tough for a buyer whose income hasn’t improved in years to make a substantial down payment. The auto loan is but one of many financial obligations; consumers also have other important things they need to pay for.
The Right Number
If most buyers cannot put down 20 percent, you are probably wondering if 20 is still the right number for a car down payment. We at Phoenix Auto Approval Center insist that 20 percent remains the ideal down payment. However, it is not the right number for everyone. If you can afford to put down 20 percent, go ahead. If not, put down the most you can afford. The right amount of down payment for a car buyer is the most that he or she can give without compromising his or her financial health.
Making a down payment is important, but so is having a financial cushion for emergencies. You need to have money saved up for the unexpected, such as home repairs, medical emergencies or job loss. It would be unwise to put down 20 percent if giving such amount would diminish the emergency fund or at least prevent the saving for such fund. The key is to put down as much as possible without risking money for the rainy day.
Therefore, the right amount of down payment is the maximum amount you can afford to put down. If the maximum amount you can afford to put down is 20 percent, then good for you.