Should You Put Money Down When Financing a Car?

When you’re looking at a new or used car, the salesperson often asks right away: How much are you putting down? It feels like a normal part of the process-until you realize you might be giving away cash you don’t have to spare. So, should you put money down when financing a car? The answer isn’t simple. It depends on your finances, your goals, and the kind of deal you’re getting.

Why Dealers Push for a Down Payment

Dealers love down payments. It’s not because they care about your financial health-they care about their profit margins. A down payment reduces the loan amount, which lowers their risk. That means they can offer you a slightly better interest rate, and they’re more likely to approve you if your credit isn’t perfect. But here’s the catch: they’re not doing you a favor. They’re protecting themselves.

Let’s say you’re looking at a $30,000 car. If you put $5,000 down, you’re financing $25,000. If you put nothing down, you’re financing the full $30,000. That extra $5,000 in principal means more interest over time. For a 60-month loan at 6.5%, that $5,000 difference adds about $1,100 in interest over the life of the loan. That’s money you could’ve saved.

When a Down Payment Makes Sense

There are real benefits to putting money down-if you have it to spare.

• You’ll owe less each month. A $5,000 down payment on a $30,000 car cuts your monthly payment by roughly $90-$110. That’s cash you can use for gas, insurance, or emergencies.
• You’ll avoid being upside-down. Cars lose value fast. In the first year, a new car can drop 20% in value. If you financed $32,000 with no down payment, you could owe more than the car is worth after just six months. That’s dangerous if you get into an accident or need to sell.
• You might get a better interest rate. Lenders see a down payment as a sign you’re serious. If your credit score is below 680, putting down 10-20% can drop your rate by 1-2 percentage points. That’s hundreds in savings.

For example, a 2024 Honda Civic with a $28,000 MSRP. If you put $3,000 down (about 11%), your monthly payment on a 60-month loan at 6.2% is $518. If you put nothing down, you’re paying $583. That’s $65 extra per month. Over five years? $3,900. That’s enough to cover three oil changes, a new set of tires, or a year of car insurance.

When You Should Skip the Down Payment

Not everyone has $3,000 or $5,000 lying around. And forcing yourself to save that much might hurt more than help.

• You don’t have an emergency fund. If you use your last $4,000 for a down payment and your fridge breaks or your car needs a transmission repair, you’ll be stuck with high-interest credit card debt. That’s worse than a slightly higher car payment.
• Your credit score is good. If you have a 740+ credit score, lenders are already competing for your business. You might get a rate as low as 4.5% with $0 down. In that case, keeping your cash gives you flexibility.
• You’re buying used. A 2022 Toyota Corolla with 45,000 miles might only be worth $20,000. Putting $4,000 down on a $20,000 car is 20%-that’s fine. But if you’re buying a $15,000 car and have $4,000 saved, you’re spending 27% of your savings. That’s not smart if you have no buffer.

In Toronto, where winter tires and salt damage are common, many buyers opt for used cars with lower prices. If you’re buying a $16,000 used car and have $2,000 saved, you might be better off keeping that $2,000 for repairs or insurance than putting it toward the down payment.

What’s the Right Down Payment Amount?

There’s no magic number, but here’s what works for most people:

• New cars: Aim for at least 10-20%. That’s $3,000-$6,000 on a $30,000 car. This helps you avoid negative equity.
• Used cars: 10% is enough. If the car is $18,000, $1,800 down is fine. You’re not losing as much value right away.
• Bad credit: 15-20% is often required. Lenders want proof you’re not taking on too much risk.

Some lenders offer $0 down options, but they usually come with higher rates or longer terms-like 72 or 84 months. That might sound good because the payment is lower, but you’re paying more in interest and staying in debt longer.

The Hidden Cost of No Down Payment

A $0 down payment might feel like a win because you’re not spending cash upfront. But it’s not free money. You’re borrowing more, and that means more interest.

Take a $28,000 car with a 72-month loan at 7.5%. With $0 down, your monthly payment is $492. Total interest paid? $6,700.

Now, add a $4,000 down payment. You finance $24,000. Monthly payment drops to $421. Total interest? $5,200.

You save $1,500 in interest-and you’re out of debt 12 months earlier. That’s not just money saved. That’s freedom.

What If You Can’t Afford a Down Payment?

You’re not stuck. Here’s what to do instead:

• Buy used. A three-year-old car with low mileage often has 30-40% less depreciation than a new one. You get more value for less money.
• Extend your search. Don’t rush. Wait a few months. Save $100-$200 a month. That’s $1,200-$2,400 in a year.
• Ask for a longer loan term with a higher down payment later. Some lenders let you make a larger payment after six months to reduce your balance. That cuts your interest without requiring cash upfront.
• Lease instead. Leasing often requires little or no down payment. You pay lower monthly payments, and you get a new car every few years. Just know you don’t own it at the end.

Many people in Toronto choose leasing because of high insurance costs and harsh winters. If you plan to keep a car for less than four years, leasing might make more sense than financing with $0 down.

What to Watch Out For

There are traps even smart buyers fall into.

• Extended warranties bundled with the loan. Salespeople push them hard. They make more commission. Don’t buy one unless you’re buying a high-mileage used car with a shaky history.
• Gap insurance isn’t free. If you put $0 down on a new car, gap insurance is a must. It covers the difference between what you owe and what your car is worth if it’s totaled. But dealers often mark it up to $1,000. Buy it from your auto insurer instead-it’s usually $15-$30 a year.
• Trade-in value is inflated. If you’re trading in your old car, dealers sometimes overvalue it to make you think you’re getting a better deal. Then they jack up the price on the new car. Always check KBB or Edmunds for your trade-in value before walking in.

Final Decision: Should You Put Money Down?

Here’s your quick checklist:

• Yes, put money down if: You have savings, your credit is average or below, you’re buying new, or you want lower monthly payments.
• No, skip the down payment if: You have no emergency fund, your credit is excellent, you’re buying a used car, or you can save $100-$200 a month until you’re ready.

There’s no right answer for everyone. But there’s a smart answer for you. Don’t let the salesperson decide for you. Run the numbers. Compare offers. Ask: What happens if I don’t have this money in six months? That’s the question that matters.