Conventional wisdom has long held that 20 percent is the magic down payment number when you're buying a new car. But the vast majority of people are making far smaller down payments. An Edmunds analysis of new- and used-car purchases in 2017 showed that the average car down payment was about 12 percent. In fact, people haven't been following the supposed conventional wisdom for years.

That raises a few questions: Why are people paying so little? Is the 20 percent down rule outdated? Are there any drawbacks to a smaller down payment? If 20 percent isn't the magic percentage, what is?

The following advice applies to financing the purchase of a new or used car. If you lease, the advice is much simpler: Put down as little as possible. Ideally, you'd pay only the drive-off fees.

Why Such Small Down Payments?

The explanation for the prevalence of small down payments is simple: It's all people can afford.

"The main reason why people aren't putting enough down is because the cost of the vehicle has substantially increased, but people's income has remained relatively flat," says Jack Gillis, director of public affairs for the Consumer Federation of America.

The average down payment of 12 percent actually has gone up slightly since 2007, when it was at 9.9 percent. Meanwhile, the cost of a new car has increased more than 23 percent in that time, according to Edmunds. If you wanted to put 20 percent down on an average new vehicle purchase, you'd have to come up with roughly $6,000.

The Down Payment Sweet Spot
The ideal down payment should be an amount for which you can reasonably save without emptying out your nest egg. Keep in mind that your trade-in can also serve as your down payment provided it has enough value.

A solid down payment will achieve two things: Reduce your monthly payment and offset the initial hit in depreciation. A new vehicle depreciates by an average of 20.3 percent in its first year, 9.9 percent in the second and 10.2 percent in the third year, according to Edmunds data. If you only put down a small amount of money, you'll have negative equity in the car, meaning you'll owe more on it than it's worth.

You can put down less than 20 percent on a new car provided you take some precautions against depreciation.

Here's what we mean: If your new car is totaled or stolen in the first couple of years, that average 12 percent down payment won't provide enough equity to cover the balance of the loan. This is why you need gap insurance or new-car replacement insurance.

Gap insurance costs a few hundred dollars but can offset any difference between what you owe and what the insurance company gives you if your car is totaled. Dealerships, auto insurance companies and third-party brokers all offer gap insurance. One thing to note about gap insurance is that it does not cover you if you're simply tired of the vehicle and want to trade it in or sell it.

New-car reimbursement coverage is available from a number of insurance companies, including Farmers, Liberty Mutual, Travelers, Allstate and Amica. If your car is totaled or stolen within the first or second year of ownership, the insurance company will pay the full cost of having it replaced. All you have to do is pay your deductible.

Prices vary. For example, Farmers Insurance said its customers pay an additional 4 to 6 percent of their comprehensive and collision premium for new-car replacement coverage. The company also offers gap insurance on a state-by-state basis, for approximately 7 percent of the customer's comprehensive and collision premium. These prices may vary based on the driver and other factors, a Farmers spokesperson said.

Combining a 12 percent down payment with the gap insurance or new-car replacement coverage lets you keep more money in your pocket without the risk of being underwater on your car loan.

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.

Zero Down

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.

Go With the Most You Can Afford

Though saving up for a 20 percent down payment may be difficult, it does give you many benefits. If your budget can accommodate it, a bigger down payment will allow you to choose a shorter finance term, which will save you money in interest charges. It will also cover most of the first-year depreciation and give you enough equity so you don't have to come up with additional money if you decide to buy a different car before you pay off the loan. And if your car is stolen or totaled in an accident, you probably won't owe anything. Plus, you can safely skip the gap insurance and new car-replacement coverage.

Down Payments for Buyers With Subprime Credit

Having so-so credit doesn't mean you can't buy a car. But if you have a FICO score of about 620 or below, making a bigger down payment could increase the chances of being approved for a loan. Banks and finance companies want to lower their risk of not being paid, so they prefer loans of smaller amounts. The more you put down, the greater your chances will be of being approved.

If you're a buyer with credit challenges, you also should resist the allure of longer-term loans, even though they offer more palatable payments. Lots of people are extending their loan terms these days: Edmunds data shows that the average term of a loan has increased to 68 months: nearly six years. Seven-year loans are not uncommon. But you'll pay much more interest in the long run on such loans. And you may get tired of that car before you've paid it off, meaning the loan may outlive the car. Rolling over payments to the next car is a bad start for a new loan.

Find Your Right Percentage

Clearly, 20 percent down is more than most people can save up. And zero percent down may not be available to everyone. So most car buyers wind up somewhere in between, putting some money down but not enough to strain their savings.

Take a look at your budget and see what percentage of the car's purchase price works best for you as a down payment. Use the Edmunds calculators to enter different down payment amounts and see how they affect the monthly payment. The general rule is that for every $1,000 that you put down, your monthly payment will drop by about $15 to $18. If depreciation would put you at financial risk in the event of an accident, pencil out the cost of gap or new-car replacement coverage.