How much should you put down on a used car?

The advice is always the same: put down twenty percent. It is repeated so often that nobody explains where it comes from, which means nobody can tell when it stops applying. It comes from one specific risk, and once you understand that risk you can work out your own number in about two minutes.

The risk the rule exists to solve

A car depreciates fastest in the months right after you buy it. A loan pays down slowly at first, because early payments are mostly interest. Put those two curves on the same chart and there is a period where you owe more than the car is worth. That is negative equity, and it is only a theoretical problem until the car is written off — at which point the insurer pays what the car was worth and you still owe the difference in cash, on a car you no longer have.

A deposit large enough to keep the loan below the value curve closes that window. On a used car, where the steepest depreciation has already been absorbed by the first owner, that number is usually smaller than twenty percent.

Running the numbers on a $20,000 car

Take a $20,000 used car at 8% APR over 72 months, and compare deposits:

• $0 down — about $351 a month, roughly $5,270 of interest over the term
• $2,000 down (10%) — about $315 a month, roughly $4,740 of interest
• $4,000 down (20%) — about $281 a month, roughly $4,220 of interest
• $6,000 down (30%) — about $246 a month, roughly $3,690 of interest

Every $2,000 of deposit buys back roughly $35 a month and around $530 of interest across the term. That is the entire trade, and it is linear — there is no magic threshold at twenty percent where the maths suddenly improves.

The term matters more than the deposit

The same $20,000 at 8%, with $2,000 down:

• 48 months — about $439 a month, roughly $3,080 of interest
• 60 months — about $365 a month, roughly $3,900 of interest
• 72 months — about $315 a month, roughly $4,740 of interest
• 84 months — about $281 a month, roughly $5,590 of interest

Stretching from 48 to 84 months drops the payment by $158 and adds around $2,500 in interest. Shortening the term is almost always the more powerful lever, and it is the one buyers reach for last because the monthly number goes the wrong way.

Two situations where a big deposit is the wrong call

You would be emptying your emergency fund

A car with no savings behind it is a car that becomes a credit-card balance the first time it needs tyres. Keep three months of expenses liquid and put down what is left. A $35-a-month saving is not worth financing a repair at 24% later.

Your rate is genuinely low

Under about 5% APR, money in the loan is cheap. If the alternative use for that cash earns more than the loan costs — paying off a credit card almost always does — then a smaller deposit is the better arithmetic. Above about 10%, put down as much as you comfortably can.

A workable rule

1. Keep three months of expenses in cash, untouched.
2. Put down 10% on a used car as a floor — enough to stay ahead of depreciation on a car that has already taken its worst hit.
3. Spend anything above that on shortening the term before increasing the deposit.
4. Above 10% APR, reverse the last two: deposit first, then term.