When you go to buy a car, your first instinct may be to opt for a financing plan that has a very low down payment. After all, the less you have to pay upfront, the better, right?
But this is a misguided way of thinking, especially since depreciation will devalue your car the moment you drive it off of the lot. With a super low down payment, you'll wind up spending more on the car than what it's worth. That's not a good way to enter into a new purchasing agreement.
If you pay too little upfront, your monthly payments will be sky high. It's definitely a tempting offer to buy a car with no down payment. If you have good credit, what's the problem, right? And while there may be certain circumstances where you need to invest in a car when you don't have the cash to make a down payment, it's always better to wait until you can afford to put some money down.
This way you get a better overall contract that affords you lower monthly payments. Plus, you reduce the likelihood that you'll overpay for a vehicle. If you don't make a down payment, the purchase will be considered "upside down" right out of the gate. You see, this means you'll owe more on the car than what it's actually worth from the moment you drive it off the lot.
If you need a car right this second, you might be wondering what the big deal is, especially if you go into this situation knowingly. But the repercussions could actually impact much more than just how much you pay for your car. It could also affect how much you're paid for your car.
If you're in an accident, an insurance company will only pay for how much the car is worth at the moment. If you didn't make a down payment or made a very low one, they will almost always pay you less than what the car is worth, meaning you won't even have enough cash to pay off your car loan, let alone buy a new one.
When pricing out a new car, your best bet is always to pay a higher down payment. But if you need more guidance than that, a 20% down payment is probably right about where you want to be. Anything lower than this and you risk significant depreciation.