If it’s time to replace what you drive and you’re looking at a number of different choices, it’s also time to ask yourself the question: How much down payment should you make on your next new car?
The answers may surprise you.
According to Edmunds.com, consumers in the U.S. put down only 11 percent on new car purchases in 2011. That’s far below the 20 percent down payment that the online automotive information source recommends.
The average U.S. down payment last year was $3,263. Mississippi had the lowest, at $2,152, and California the highest, at $5,139.
What’s going on here? In a statement, Edward Montoya, consumer advice editor for Edmunds.com said, “Many people want to pay just enough cash down in order to get the payments and interest rate to a point that fits their budget and keeps more cash in their pocket.”
While that’s certainly going to make sense to many cash-strapped buyers – especially in multi-car households – these days, in the long run, it may be a losing proposition. Montoya recommends buyers put down a larger down payment on their next new car to “offset the vehicle’s depreciation and earn equity in the car sooner.”
Points to Consider
When trying to determine how much down payment you should make on your next new car, keep in mind the following points:
- Depreciation matters. – The old saying that your new car starts to depreciate the minute you drive it off the dealer’s lot is true. While estimates vary, depending on the source, Edmunds.com says that a new car depreciates an estimated average of 21.8 percent by the end of the first year of ownership. Incidentally, Edmunds.com says you can calculate your car’s depreciation by dividing the original purchase price into its trade-in price after one year’s ownership.
- Bigger down payment has no downside. – According to Edmunds.com, there’s simply no such thing as a downside to a bigger down payment. Of course, you have to be able to afford the larger down payment. No sense depleting your savings entirely just to do so. But, if it makes sense and you can do it, not only do you build equity in your car faster, but you can take advantage of a shorter finance term, which will also save you considerable money in interest charges.
- Consider paying more each month. – Maybe you don’t have the chunk of cash o equal the 20 percent down payment, but you may be able to swing an extra hundred dollars or so over and above your monthly car payment. Taking this route will also help you build equity in your new car and you pay it off sooner.
- Used cars, different rules. – Suppose your next new car is a good used model? Should you go the 20 percent down? Edmunds.com recommends buyers allocate “at least” 10 percent down payment. That’s because used cars also depreciate, but at a much slower rate. A 10 percent down payment should be sufficient to cover a used car’s one-year depreciation.
Still weighing and balancing how much down payment to make on your next new car? Keep in mind that more is better – in the long run.