Do I need a Down Payment When Purchasing a Vehicle?

^{By Karen Barrett, Bromwich+Smith Staff | 800 words | Reading Time: 4 minutes| Date: 2023/12/15}

Are you planning to purchase a new or used vehicle?  Are you wondering whether you should put money down on your new purchase?  How much should you put down?  How will a down payment be a benefit to you?  What if you don’t have money to put down?  Although a down payment is not always required it could be advantageous to you. 

Benefits of a down payment: 

1. Lower monthly payment – The more money you put down, the less you finance and the lower your monthly payments will be.   

2. More equity goes into the vehicle starting out.  Vehicles are a depreciating asset.  As the value of your vehicle decreases, the more likely you are to become upside down (owe more than your car is worth).  In other words, a down payment can help offset some of the depreciation. 

3. The less you finance the less interest is paid.  With a smaller loan, you’ll pay interest on a lower balance.  This means the total interest paid will be less. 

4. Finance companies will look more favorably upon your loan application with money down.  The more money down, the less of a credit risk you are to them. 

Disadvantages of a down payment: 

1. A down payment can drain your savings.  You don’t want to use all your savings and lose the safety net you’ve accumulated for emergencies or other expenses. 

2. You may not have time to save.  Many people don’t have the time to save for a down payment because the need for a vehicle is often immediate. 

3. A large down payment usually won’t help you get a lower interest rate. 

4. You can’t use the money elsewhere.  Once the money has been used for a down payment it is reflected on your loan documents, and you won’t be able to get that money back. 

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How much down payment do I need? 

The general rule of thumb for a new vehicle is 20/4/10.  This means at least 20% down payment, 4 years (48 months) to pay the loan and keeping transportation costs just under 10% of your monthly income.  Transportation costs include the loan payment, fuel costs and maintenance expenses.  This rule changes slightly for a used vehicle where the down payment would be 10% rather than 20%.   

This rule has many benefits, it can help you stay within your budget, ensures you can afford to pay for the purchase and helps to lessen the interest paid.  There are also some drawbacks, some buyers may have a limited budget and are unable to save the 20% down payment, need the vehicle right away, or are financially unable to take a short-term loan with higher payments. 

What if I don’t have a cash down payment? 

Not everyone buying a vehicle has money to put down.  Maybe you have a vehicle you can trade?  This can be counted as a down payment if there is equity in it (it’s worth more than any loans against it).  You could also use a combination of a trade-in and cash.  Please do not use a credit card for your down payment! This is a very expensive form of credit and will only add to your monthly debt load unless it can be paid off immediately. 

 Conclusion: 

Complete a budget to see if a new vehicle is feasible.  Consider the cost of the monthly loan payment, fuel, insurance, repairs, and upkeep (oil changes, winter tires, and more).  To bring the loan amount down you may want to consider a used vehicle purchased from a dealership or privately.  Maybe look at a vehicle without all the bells and whistles.  Ask yourself, do I really need this new vehicle or is this more of a want than a need?  If you’re thinking a new vehicle might be in your future, try the 20/4/10 to see if it works for you and your budget.  You may be able to adjust some expenses in your budget to make a new car fit.   

A vehicle is a big purchase.  Don’t make that purchase on a whim. Take your time, complete a budget, do your research, and buy a vehicle you can afford. We have all been caught up in the excitement of buying something only to have “buyer’s remorse” afterwards.  A vehicle is not a purchase that is easily returned without suffering expensive financial ramifications.  Buying a new vehicle should feel as good in 2 months’ time as it did the first time you drove it off the lot! 

If you find yourself struggling to balance your budget, reach out today and learn about your debt relief options.  Thousands of Canadians every year look to Licensed Insolvency Trustees like those at  Bromwich+Smith to learn about available debt relief programs. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1-855-884-9243, or request a call back at contact us page.       

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By Karen Barrett - Auto Dealership Partner Specialist 

Karen has been in the finance industry specializing in automotive finance for over 2 decades.  Karen has seen many people overextend their finances due to a vehicle purchase they may not have fully understood.  She encourages everyone to read and understand any contract prior to signing it.  If you don’t agree…. don’t sign! 

If you are automotive dealership manager reach out to Karen at : [email protected]