Used-Car Down Payments
It's a slightly different story when it comes to used-car down payments. In general, used cars depreciate at a slower rate than new cars. But if you've purchased a used car at a dealership, chances are that the dealership has marked up the price. This inflates the first year of its depreciation. For example, a 5-year-old Honda CR-V, purchased from a dealership in January 2017, will have depreciated an estimated 23 percent by the end of the year, about double the depreciation of a used car not purchased at a dealership.
So, where does this leave the used-car down payment?
Edmunds data shows that the average used-car down payment is about 11.7 percent of the selling price. This should be adequate for a used-car purchase from a private party since the prices are lower and the depreciation is slower. If you've opted to buy from a dealership, however, make sure that you negotiate to minimize the effect on its depreciation. Most importantly, don't get rid of the car in the first couple years. Give it time for the depreciation to settle down.
Here are a few other down payment philosophies, along with their pros and cons.
Paying nothing down keeps the most money in your pocket. You can get into a new car without having to save for months in advance. Your credit, however, needs to be in great shape in order for the finance company to approve a zero-down loan. Two drawbacks to paying nothing down are higher monthly payments and higher finance charges. (Finance charges aren't an issue if you qualify for zero percent APR.) And, as in the 12 percent down scenario, you will be upside down on the car loan, initially owing more money than the car is worth.
What about those widely advertised "Zero Down/Zero APR" specials? They draw shopper attention, but as few as 10 percent of shoppers will qualify for them. And even if you are one of them, it's still a good idea to make a down payment to reduce the amount of debt you are taking on.
If you want to go the zero-down route, we highly recommend gap or new-car replacement insurance.