Buying Your Next Car: How Big of a Down Payment Should You Have?

Most car dealers will bend over backwards to find a way to qualify you for a loan. They often make much more on the actual loan than the sale of the vehicle and have every incentive to send you home with a vehicle. Most consumers understand that they should have a game plan in place to pay for their vehicle before they walk on to a car lot. Most financial counselors recommend getting the financing set up ahead of time. There's always the question of how much one should have as a down payment on their vehicle when they buy one. In this case, there's a hard and fast rule you can follow. Your down payment should be 100% of the cost of the vehicle. Follow me on this one.

The average car payment is $378 over 63 months. That's a lot of money over a period of 5 years. Chances are after the five years is up, you'll want to get into a newer vehicle and get stuck with another car payment. Paying for cars through financing can be a vicious cycle if you allow it to happen. If you follow the car dealer's plan for you, you'll be paying that much money every month for the rest of your adult life. Car payments are essentially throwing money down the drain.

There's a better and much more affordable way to drive cars. Chances are you're already in a vehicle. Let's say that you have a car that's worth $5000 right now. It's drivable, it works fine, but you know that you probably want to upgrade in about a year. Let's say you saved that $378 a month for a year, you'd then be able to buy a $10,000 car with your trade-in, and you would own it free and clear. If you did it another year later, you'd be able to buy a $15,000 car.

This doesn't work out with very expensive new vehicles, but they're a waste of money in most cases anyway. Brand new cars depreciate 40% of their value in the first four years of ownership anyway. For most people a good $10,000 to $15,000 car will suit them just fine. After two years, you'll have a $15,000 car, paid for in full instead of having 39 months more of $378 payments!

You're also saving a ton of money in interest. The only 0% loans available anymore are for new cars, which most people can't afford whether they want to admit to it or not. Most car loans are now 7-8% in interest, and instead of having to hand that money over to the bank, you get to keep it!

Just imagine how much money you would have if you had put that $378 a month into a solid mutual fund over the course of your working adult life (age 25-45). If you put it into a mutual fund earning 9% back, you'd come home with nearly $1.8 million dollars. I don't know about you, but I'd rather have the $2 million than being able to drive a little bit fancier cars throughout my adult life!

Save up and pay cash for your next vehicle. It'll force you to be wiser with your purchases and save you a ton of money through the course of your life. If it's an emergency, go ahead and get yourself something reasonable, but in most cases you have more than enough time to save up and pay cash for your next vehicle.