How Much of a Down Payment Should You Make on a Car?


There are a lot of decisions that need to be made when you’re buying a car. If you choose to finance a car, one of the many factors that affect your monthly payments will be the amount you put as a down payment on a car. While in the past, the commonly recommended amount to use as a down payment was 20% of the vehicle’s price. Recently, in a study conducted by Edmunds, it was found that typically customers only put on average 11.7% as a down payment. So what does this tell us? Is 20% really an overkill amount to use as a down payment or is it a number you should consider when financing a car? Ultimately, everyone’s financing situation is different and there is no one term fits all scenario. In this article, we’ll talk about all the factors and everything else you need to know about making a down payment on a car. 

Why Make Minimum Down Payments?

You may wonder why people opt to make such small down payments on their car but the answer is simple, people can’t afford to make large down payments. Car prices in Canada are continually increasing while the average income remains steady, causing Canadian car buyers to be more creative in how they seek financing. If they were to try and make a 20% down payment, they would struggle to make the monthly payments on the vehicle while balancing all of their other living expenses. 

How Does a Down Payment Affect Your Monthly Payments?

If you’re able to make a significant down payment, it will affect your loan and ultimately your monthly payments in two ways. First off, the more you make as a down payment the less you’ll owe each month for your loan as you’ve already put money towards the loaned asset. Secondly, the more you put as a down payment means the less you’re asking the lender for a loan, making them feel less at risk by loaning the money. If the lender feels the loan is low risk, meaning they’re confident the loan will be repaid, this will result in a lower interest rate. The difference between a low interest rate and a high-interest rate could be thousands of dollars. 

How to Decide on a Down Payment 

Ideally, the amount you use as a down payment is a number that you can put down without making a significant dent in your savings account. There’s nothing wrong with putting less than 20% down, and if you have a solid credit score, your interest rate won’t be affected as much because of a lesser down payment. You may also have a trade-in vehicle that could give you that extra little bump. A great way to play around with different down payment options is to use a car loan calculator. Using a calculator will allow you to change the terms of a loan according to the vehicle price and see what your monthly payments will look like. You may notice that if you we’re able to make a $5,000 down payment for example that your monthly payments over a 60-month term seem much more affordable. 

Zero Down Financing Options

While zero down financing is a great option for anyone who doesn’t want to save up for a car, zero down financing is typically limited to a select group of people who have great credit scores. There are three disadvantages to agreeing to a zero down payment financing option. The first is that your monthly payments will be higher. Secondly, because you’re not putting any money down initially, you’ll be asking for a bigger loan from the lender, often resulting in a higher interest rate. The last disadvantage to zero-down financing is that initially when you sign up for the loan you’ll be in what’s known as an “upside-down” loan. This simply means that you owe more money than the car’s overall value. 

Down Payments for People With Bad Credit

Just because you have bad credit, doesn’t mean you won’t get approved for financing on a car. Getting a car loan with bad credit certainly makes getting approval more difficult, but not impossible. One thing you can do to increase the likelihood of being approved with bad credit is to make a down payment. If you have bad credit, lenders see you as a high-risk borrower, the main way you can mitigate their risk levels is to ask for a smaller loan by making a down payment. The second thing you’ll want to do when applying for a car loan with bad credit is to agree to the shortest term length you can afford to minimize high-interest costs.

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