When you hear about new car deals, you often hear about zero money down. A new trend in the automotive industry is that car dealerships tell you that you don’t have to put any money down to get your new car.
The most traditional advice in putting money down is to pay 20% of the value of the new car as the down payment. That is still good advice, because if you don’t put this much into a down payment, in the long run you will be paying much more than the car is actually worth. When you put a 20% down payment, you will pay the same value that your car would be worth over the longer run, if you pay through yearly installments. Putting 20% down means that you have put a year’s depreciation up front.
An average car depreciates 20% every year. The second you drive your new car, the value goes down by 20%. If in a month you lose your job, you would have to liquidate your assets, and that would mean that you would have to sell your new car. You might get 80% of the price back, but if you have made no down payment, then you would still have to pay the remaining 20% of the loan. In a car deal, this is called being “upside down.”