If you're going to borrow to buy a car or truck, you'll have to determine how large your down payment should be. That choice could affect your wallet for years to come. To make a well-informed decision, you should know what's at stake.
Advantages of a larger down payment
Higher chance of approval. The more money you put down, the less risk a lender takes when offering you a loan. If your credit history isn't the greatest, a larger down payment could make the difference between approval or rejection.
Lower interest rate. Your risk to the lender doesn't just affect the approval decision. It also influences the interest rate. More money down could cut your cost of borrowing and give you more to spend on other things.
Lower payment. The more you put down, the lower your monthly payment. That may make it easier for you to choose a shorter repayment period. That means a shorter wait for the day when you own your vehicle free and clear.
More equity. Just like equity in a home, equity in a car is the difference between how much it's worth and how much you still owe. If you decide to sell it before paying it off, higher equity means more money to put toward your next car.
Lower risk of being upside down. When you're “upside down” on a loan, you owe more than the car is worth. If you sell it, you'll have to pay off the balance.
Likewise, if you're in an accident and the insurer declares your car a total loss, the insurer will pay you the actual cash value, minus any applicable policy deductibles. You'll then have to pay off the remaining loan balance.
Better credit profile. The less you owe and the lower your monthly payment, the more room you'll have for future borrowing, such as a home mortgage.
Other down payment considerations
With a large down payment offering so many advantages, it's easy to get carried away. There are some things to keep in mind before committing to that scenario.
Other cash needs. Avoid drawing down your cash so much that you're not prepared for emergencies. Financial experts recommend setting aside the equivalent of at least three to six months of your regular expenses.
Competing money uses. A consideration in how big of a down payment you put down is the interest rate on the vehicle loan in comparison to what you could earn by saving or investing the money. Having said that, personal finances are personal, so some may prefer to finance less and have less debt, while others may prefer to have the money on hand, regardless of the math. Nevertheless, make sure the numbers fit your budget.
Other debts. If you have an existing debt with an interest rate higher than you'll be paying on your car loan — maybe a credit card — consider making a smaller down payment. Use some of your cash to pay down those higher-interest balances.
Trade-in value. If you're trading in, your old vehicle's value — minus anything still owed on it — has the same effect as a larger cash down payment. Factor that into the math when you're thinking about how much to put down.
Lease down payments
What if you're leasing instead of buying? Just like buying a car, a larger down payment on a lease can lower your monthly payment. In fact, if you see an ad for a very low lease payment, you may find the fine print assumes a large down payment.
However, there's a risk to a hefty down payment on a lease. If you total the car or it's stolen, the insurer likely will reimburse the leasing company. But don't expect to get your down payment back. So, when it comes to leasing, you may want to steer toward a lower down payment or none.
Saving for your down payment
If you don't have much money for a down payment today, you may want to postpone your vehicle purchase.
Here's a great way to build up a down payment fund. Set up an automatic transfer from your checking account into a separate account that pays interest and nickname the account, so the goal is specific. For example, Auto Down Payment Fund. Since this is a shorter-term goal, stick to accounts that don't put the amount you deposit at market risk — such as a bank savings account.
If you don't have a car payment now, consider putting the equivalent amount into your savings account every month. In addition to building your down payment, you'll get used to living without that money. That may make the transition easier when your loan payments start.
You also could give your down payment fund a boost with any extra lump sums during the year, such as a performance or military bonus or income tax refund.
Crunch the numbers.
To give you an idea of how your monthly payment might differ depending on how much you borrow and put down, use the USAA auto loan calculator.
Explore USAA Federal Savings Bank.
Find out how we can help you finance your next vehicle.