Car Deal Canada

Do You Need a Down Payment for a Car?

Do You Need a Downpayment for a Car?

Buying a car is one of the biggest purchases many people will make in their lifetimes. With the average price of a new vehicle in Canada topping $48,000 in 2022, it’s no small financial commitment. One of the key questions you’ll need to answer when buying a car is how much money you need to put down upfront. This down payment amount can have major implications for the loan terms you qualify for, your interest costs, monthly payments, and more.


This comprehensive guide will walk you through everything you need to know about car down payments in Canada. We’ll cover whether you actually need to put money down, how much you should aim to pay as a down payment, the pros and cons of different down payment amounts, creative down payment options beyond just cash, and much more. By understanding the ins and outs of auto down payments, you’ll be in a great position to make the right down payment decision for your budget and financial situation when that new or used car purchase comes along.

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Do You Need a Down Payment for a Car?

When it comes to financing a car purchase, one of the first questions that comes to mind is whether or not you need to put money down. The short answer is no – there are no laws stating a down payment is required when buying a car.

With that said, while 0% down car loans are legal, most lenders strongly prefer that borrowers make some sort of down payment. Putting money down shows the lender you are financially committed to the transaction. It also lowers the amount being financed, which reduces the lender’s risk exposure on the loan.

Lenders look at down payments as an indicator of how likely you are to make your monthly car payments responsibly. No down payment could signal greater risk of default to the lender. As a result, loans with no down payment often come with higher interest rates, shorter terms, and stricter credit requirements.

The bottom line is you can legally get approved for 0% down, but it may come with less favorable loan terms. Most experts recommend putting at least 10-20% down if possible when financing a car purchase.

 

Recommended Down Payments for New Cars

When buying a new car, putting down 20% or more of the total purchase price is considered ideal by most experts. While you can certainly get approved for a new car loan with less down or even 0%, paying at least 20% down comes with some major benefits that are worth considering.

First and foremost, a down payment of 20% or more will significantly lower your monthly car loan payments. Since you are financing less money after putting more down upfront, your monthly principal and interest charges will be lower. This makes the car payment more affordable to fit into your monthly budget.

In addition, a larger down payment reduces your total interest costs over the life of the auto loan. When you borrow less money, you pay less in total interest – saving you hundreds or even thousands of dollars compared to a 0% down loan. So not only will your monthly payments be lower, but your total out-of-pocket costs will be lower too.

Finally, putting down 20% or more gives you a good amount of equity in the vehicle right away. This sets you up well in case you want to trade in or sell the car later. You are less likely to be “upside down” on the loan (owing more than the car is worth) if you have been consistently making payments on a 20%+ down loan.

While not everyone can afford to put 20% or more down on a new car purchase, doing so provides peace of mind through lower payments, less interest paid, and instant equity. Evaluate your budget to put down as much as possible when buying new.

 

Used Car Down Payments

When purchasing a used vehicle, a down payment of around 10% of the car’s price is typically recommended by experts. While you may be able to get approved for financing with 0% down, putting at least 10% down comes with some key benefits:

Lower monthly payments – With a lower loan amount after your down payment, your monthly payments will be reduced compared to financing the entire cost.

Less interest paid – Putting 10% down upfront means you’ll good amount of equity in the vehicle over the life of the loan, saving money.

Stronger loan terms – Lenders view a 10% down payment on a used car as a sign you’re financially committed, which can help you qualify for better rates.

Equity protection – Your down payment provides a cushion so if the car depreciates, you’re less likely to end up owing more than it’s worth.

While coming up with 10% of a used car’s cost may take some saving, the benefits often make it worth the effort before you start shopping for vehicles.

 

Pros of 0% Down Car Loans

Getting approved for a 0% down car loan can provide some advantages compared to making a down payment upfront. Here are some of the potential pros of 0% down auto financing:

 

Upfront Cost Savings

The main benefit of 0% down is avoiding a large cash outlay when you first go to the dealership. Putting 10-20% down on a $30,000 car means you need $3,000-$6,000 on hand. With 0% down financing, you can get into the new car without laying out thousands upfront.

This conserves your cash for other priorities. Maybe you want to save up for a house down payment or pay off high interest credit card debt instead. 0% down auto loans let you divert your available cash to other financial goals.

 

Conserve Cash for Emergencies

In addition to saving for other goals, keeping your cash also gives you a buffer for unexpected expenses. Vet bills, home repairs, job loss – you never know when an emergency might hit. By not tying up cash in a down payment, you keep funds available to handle surprises.

While 0% down loans don’t build equity, the flexibility of keeping your cash reserves may be worth the tradeoff. You avoid the stress of draining your savings on a down payment when that money could be needed for emergency costs down the road.

 

Cons of 0% Down Car Loans

While a 0% down car loan may seem attractive since you don’t have to put any money down upfront, this option comes with some significant drawbacks you need to be aware of.

The main downside of a no down payment car loan is that you will end up paying much higher interest rates and financing costs overall. With no down payment, lenders view you as higher risk and will charge a higher annual percentage rate (APR) to compensate. Rates for 0% down loans can be anywhere from 4-8% higher versus putting 20% down. This means you pay thousands more in interest charges over the loan term.

Going with 0% down also means you have no equity cushion in the vehicle. Since you are financing 100% of the purchase price, you owe the full amount from day one. If the car gets totaled in an accident or declines significantly in value, you could end up owing more than the car is even worth. This is known as being “upside down” or “underwater” on your loan. Without a down payment, it’s very easy to end up in this negative equity position.

Overall, while 0% down car loans allow you to get into a vehicle without large upfront cash, they come at the cost of much higher long-term expenses and increased financial risk. You need to carefully weigh if the short-term benefit is worth paying thousands more in interest and putting yourself in a precarious financial position over the life of the loan.

 

Down Payment Options

When it comes to making a down payment on a new or used car, you have a few options:

 

Cash

Using cash, whether from your savings account, checking account, or other liquid assets is the most straightforward way to make a down payment. Paying with physical cash or cashier’s check gives you maximum negotiating leverage and doesn’t involve any financing contingencies.

 

Trade-In

Trading in your current vehicle can directly reduce the sales price and your required down payment. Make sure to research trade-in values first to ensure you’re getting a fair offer. Dealers may inflate the trade-in value on paper to show a lower sales price and down payment.

 

Rebates

Manufacturer rebates and dealer incentives can effectively lower the purchase price, reducing the required down payment amount. Rebates don’t lower your out-of-pocket costs as much as a trade-in, but they provide another way to reduce your down payment if you don’t have a trade.

Combining a trade-in, rebates, dealer discounts, and your own cash can help maximize your down payment savings when buying a new or used car.

 

Down Payment Calculator

A down payment calculator is a useful tool to estimate how much you’ll need to put down based on factors like the car price, loan terms, interest rate, and more. Here are some tips on using a auto down payment calculator:

 

  • Enter the car’s price – This is the total sticker price or agreed upon sale price.
  • Input the loan term – Typical terms are 36, 48, 60, or 72 months.
  • Estimate your interest rate – Check bank/lender pre-approval rates or use current average rates.
  • Select your desired monthly payment – Pick a payment you’re comfortable with based on your budget.
  • Enter any trade-in value – If you’re trading a car in, enter the estimated trade-in amount.

 

With these inputs, the calculator will estimate the down payment needed to reach your target monthly payment. It’s a quick way to play with different down payment, loan term, and monthly payment scenarios.

For example, you may find stretching the loan term reduces the down payment needed. Or that a larger down payment dramatically lowers monthly costs. Use the calculator early when budgeting to ensure you save enough for a reasonable down payment.

 

Pre-Approval vs Pre-Qualification

When getting ready to buy a car, you’ll likely hear the terms “pre-approval” and “pre-qualification” used frequently. While they sound similar, there are some important differences between pre-approval and pre-qualification for an auto loan that can impact your purchasing experience.

Pre-qualification is when a lender provides an estimate of the loan amount, rates, and terms you may qualify for based on a soft credit check and limited information provided. It’s a ballpark figure and not a firm approval.

Pre-approval involves the lender doing a hard credit check and verifying your income, debts, and other financial information. If approved, you receive a firm offer with guaranteed rates and terms, up to a specified loan amount. The pre-approval is valid for a set period, usually 30-60 days.

The main benefit of getting pre-approved is that it turns you from a browsing shopper into a serious, ready-to-buy purchaser. The dealer knows you are approved for financing and can complete the sale more quickly. You also enter negotiations from a stronger position, without the dealer using financing as leverage.

Overall, going through pre-approval rather than just pre-qualification sets you up for a smoother, faster car buying experience. You eliminate financing contingencies and can focus your efforts on getting the best possible deal on the car itself.

 

Down Payment Tax Benefits

Putting down a larger down payment on a car can provide some tax advantages in certain situations. One potential benefit is being able to deduct the interest paid on an auto loan.

In Canada, the interest portion of car loan payments is tax deductible if the borrowed money is used for business purposes or to earn investment income. For example, if you take out an auto loan to purchase a vehicle used primarily for your self-employed business, the interest can be deducted on your tax return.

To qualify for the tax deduction, you must keep detailed records showing the vehicle’s business vs personal use. The larger your down payment, the lower your auto loan principal, which reduces the amount of interest you pay over the life of the loan. This means a lower tax deduction, but the tradeoff is you pay less interest overall.

For purely personal vehicle purchases, the interest is not tax deductible. However, a larger down payment still benefits you by minimizing interest costs and total loan payments.

Consult your accountant to understand how down payment amounts on business/investment vehicles impact potential interest deductions and your overall tax position.

 

Down Payment Rules of Thumb

When it comes to car down payments, there are some general rules of thumb to follow:

For new cars, aim for a down payment of at least 20% of the purchase price. Putting down 20% or more on a new car will help you get the best interest rates and loan terms from lenders. The higher your down payment, the lower your monthly payments will be as well.

For used cars, plan for a down payment of around 10% of the selling price. While you can sometimes get away with less, a 10% down payment on a used vehicle still provides benefits like lower interest rates and more equity in the car.

In either case, the more money you can put down on a car purchase, the better off you’ll generally be. A larger down payment reduces the amount you have to finance, which saves on interest charges over the life of the loan. It also gives you equity in the car right away in case you want to trade it in later.

While zero down car loans are advertised, they often come with much higher interest rates and less favorable loan terms. If possible, make every effort to put down 10-20% or more when purchasing a new or used car.

 

Down Payment vs Monthly Payments

One of the key tradeoffs to understand when buying a car is the relationship between your down payment amount and monthly payments. In simple terms, the more money you put down upfront, the lower your monthly car loan payments will be. This occurs because a larger down payment lowers the amount you have to finance – so you pay interest on a smaller principal balance.

For example, let’s say you purchase a $30,000 car:

 

  • With a $6,000 (20%) down payment, your loan would be $24,000. At a 5% rate over 5 years, the monthly payment would be around $450.
  • With a $3,000 (10%) down payment, your loan balance jumps to $27,000. Now the monthly payment is approximately $500.
  • With $0 down, you finance the full $30,000. Your monthly payment would be $560.

 

As you can see, the monthly payment differences can be substantial based on your down payment amount. Putting more money down upfront directly translates to having lower monthly car payments over the life of your auto loan.

The tradeoff is you need to have enough cash on hand to make a larger down payment. But if you can swing it, the monthly savings often make it worthwhile. Just run the numbers for your particular situation to find the right balance between down payment and monthly budget.

 

Alternatives to Down Payments

If you can’t afford a down payment, there are some alternatives to explore:

 

Higher Interest Rate

Some lenders may approve a no down payment car loan but charge a higher interest rate to offset the additional risk. While this results in higher total costs over the loan term, it allows you to get into the car without any money down.

 

Shorter Loan Term

Opting for a shorter loan term (e.g. 36 months instead of 60 months) will mean higher monthly payments but less interest paid overall. This can help compensate for no down payment.

 

Purchase a Cheaper Car

Buying a less expensive used car can make a $0 down payment more feasible. The overall loan amount will be lower, so the lender’s risk is reduced. Just make sure any used car is thoroughly inspected first.

While these options let you avoid a down payment, it’s usually better to save up and put some money down if possible. This will result in the best loan terms and lowest costs over time.

 

Down Payment Advice

When it comes to car down payments, seeking expert advice can help you make the best financial decision for your situation. Here are some tips from the pros:

 

  • If you have the cash available, make as large of a down payment as you can afford. Aim for 20% or more if possible.
  • Only put down as much as you can reasonably afford based on your budget. Don’t overextend yourself financially.
  • Shop around for the best financing terms, even if you have to put less down. Compare rates from banks, credit unions, and dealers.
  • If your credit is limited, a larger down payment shows your commitment and can help you get approved and get better rates.
  • Consider the total interest costs over the loan term, not just the monthly payments. A larger down payment saves substantially on interest.
  • A down payment builds instant equity in your vehicle, protecting you if you want to trade-in or sell it later.
  • If you’re putting 0% down, make sure you understand the higher interest rates and total costs over time.
  • Only accept 0% financing deals if you could alternatively afford a reasonable down payment. It protects you from being upside down on the loan.
  • If money is extremely tight, look at less expensive used vehicle options that require a smaller down payment amount.

 

Using expert tips like these can guide you in determining the right down payment amount for your unique situation.

 

Conclusion

In summary, while a down payment on a car purchase is not always required, putting money down comes with many benefits. Making a larger down payment of 20% or more for a new car, or 10% for a used car, can get you lower interest rates, reduce your monthly payments, and help you build equity faster. This puts you in a better position if you want to trade in or sell the vehicle later.

However, don’t let a lack of funds for a down payment deter you completely. Explore all of your financing options, including 0% down loans, if needed. Just be aware that 0% down usually means higher interest rates and overall costs. Evaluate your budget realistically to put down as much as you can upfront. This will lead to the most affordable loan terms and ownership experience over time.

The key takeaways are:

 

  • Down payments aren’t absolutely required, but recommended for the best loan terms
  • 20% down or more for new cars; 10% for used cars
  • Down payments reduce interest costs and monthly payments
  • 0% down is possible but leads to higher rates/expenses
  • Put down as much as you can afford for the most benefits

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Questions About Car Loan Downpayment's

In Canada, most lenders require a down payment of at least 5-20% of the vehicle’s price when financing a car purchase. However, some lenders may approve a car loan with $0 down for those with exceptional credit. While no down payment car loans are appealing, they often come with higher interest rates and longer loan terms which cost more in the long run. Putting 20% or more down is ideal to get the best rates.

The average down payment on a car purchase in Canada is between 10-20% for new vehicles and 5-10% for used. On a $30,000 new car, that would equal a $3,000 – $6,000 down payment. And for a $15,000 used car, between $750 – $1,500 down. The more you put down, the lower your monthly payments and interest charges will be.

Most financial experts in Canada recommend putting down at least 20% of the vehicle’s purchase price if you’re financing a new car and 10% for a used car. The higher the down payment, the less interest you pay over the loan term. A 20% or higher down payment also leads to faster equity gain and lower chances of the loan being upside down.

Yes, some lenders in Canada will approve a $0 down car loan, even for private sales, if you have good credit (scores over 700). No down payment auto loans typically come with higher interest rates, shorter terms (5 years max), and stricter stipulations. You’ll also need to purchase gap insurance when putting $0 down on a vehicle.

 

When putting a down payment on a car at a Canadian dealership, you’ll need to provide valid ID, proof of income (recent pay stubs), proof of address (utility bill), the down payment amount in certified cheque or bank draft, and possibly a co-signer if you have little credit history. For private sales, a bill of sale with down payment amount indicated suffices.

Yes, the trade-in value of your current vehicle can count towards the down payment on your next car purchase in Canada. Inform the dealer or seller you plan to trade-in when first negotiating the selling price. The trade-in value gets deducted from the vehicle’s price and your down payment requirement. This allows you to leverage equity you have in a current owned vehicle.

The ideal down payment is 20% or higher of the vehicle’s price. This amount lowers your car loan principal for less interest paid, results in more equity upfront, allows better loan terms, protects against depreciation, and avoids paying “under water” on the loan if wanting to trade-in or sell the car early.

Yes, you can combine cash and trade-in value towards the down payment when purchasing a vehicle in Canada. Inform the dealer you plan to trade-in and determine its value to deduct from the selling price. Then use your cash on top to reach the down payment amount needed. Using both cash and equity gets you to 20% down faster.

The more money you put down on a vehicle purchase, the greater the benefits. A down payment over 20% of the price leads to lower monthly payments, reduction of interest costs over the loan term, paying off the loan faster, increased equity in the car, improved resale value, and greater protection if wanting to trade-in or sell the car earlier than expected.

It’s best to negotiate the vehicle’s price before putting any money down in Canada. This allows you to secure the lowest price first. You have the most leverage to get a discount before the dealer has received a down payment. After you’ve agreed on price, you would then provide the down payment and sign the bill of sale or financing agreement.

Some top tips for saving for a car down payment include: setting up automatic transfers to a separate savings account, using a budgeting app to track spending, cutting discretionary expenses, earning extra income on the side, receiving the CCB child benefit, contributing tax refunds and bonuses, selling unused items, and investing early with compound growth.

Financial advisors recommend a car down payment does not exceed 10% of your gross annual income. This limit ensures you have savings left for other goals, you don’t overextend your budget, and you have a manageable loan. For example, if you earn $60,000 per year gross, your down payment should not surpass $6,000.

 

Yes, you can use a personal line of credit to fund a car’s down payment in Canada. The line of credit provides access to a pre-approved borrowing limit at competitive interest rates. As you repay, that credit can be reused as needed. Lines of credit offer flexibility, but should be used sparingly, with a solid repayment plan.

For private car sales, the safest way to pay the down payment is with a bank draft, money order, certified cheque, cashier’s cheque, Interac e-Transfer, wire transfer, or cash. These options offer security and proof of payment. Get a bill of sale from the seller indicating the down payment amount paid and keep a paper trail of the payment.

 

If purchasing a used car from the owner and they still owe money on the loan, you would provide the down payment to the owner first as agreed upon. The owner would then pay off their lienholder using the down payment funds received. You finalize paperwork from the lienholder showing the loan has been paid off before taking ownership.

Common fees due upon signing a leased vehicle with down payment in Canada include: acquisition/bank fee ($300+), registration cost, licensing fee, lien registration fee ($25+), security registration fee ($10+), and sales tax on down payment. Ask the leasing agent to fully disclose all fees needing payment with the down payment.

Some of the best ways to invest for a future down payment include balanced index funds, high interest savings accounts, GICs, and dividend stocks. These options provide returns outpacing inflation to grow your money over time with less risk than individual stocks. Use time horizons and tolerance for risk to guide investment choices.

 

The typical down payment on a leased vehicle in Canada ranges from 0-20% of the car’s value. Most lease down payments fall between $1,000 – $4,000, with higher amounts lowering your monthly payment. Manufacturers sometimes offer lease deals with $0 down to get you into the car for the lowest start-up and monthly cost.

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