Buying a car in Canada is among the most expensive purchases consumers make. As of April 2022, the average price of a used vehicle in the country ranges between $33,359 and $46,651. For new cars, it can range from $39,755 to $69,960.
Most Canadians finance their vehicles via car loans. Therefore, it’s vital to consider the following before purchasing:
- Price
- Maintenance cost
- Downpayment
Most car dealerships demand some downpayment on the car price when taking a car loan. It gives them the security they need if the client defaults on their payments.
A downpayment can include cash-on-hand, trade-ins, and any rebates you qualify for. In the following sections, learn everything you need to know about making a downpayment on a car loan in Canada.
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How Much Should a Down Payment for a Car Be?
While there’s no fixed amount for a downpayment when financing a vehicle in Canada, you should aim between 10% to 20%. However, it still depends on your financial situation. If you can afford to pay more, the better.
| ???? Note:
A car loan downpayment helps you qualify for a lower interest rate and decreases the total cost of the car. Although a higher down payment is ideal, even a smaller one is better than no upfront payment. |
Typically, a downpayment covers the gap between the car loan and the car’s value. Most lenders only lend you an amount, at most, equal to the car’s value. This is to avoid being at a loss if they repossess the vehicle.
| ✅ Pro Tip:
You can trade in your old car as a downpayment to give an extra bump to your credit. |
How to Calculate Your Car Downpayment
It’s crucial to understand how much you’ll pay monthly. Otherwise, you’ll end up going over budget. However, learning how much a downpayment is for a car you are interested in is recommended before anything else.
| To calculate your downpayment:
Assume the vehicle you want to buy is $30,000, and you plan on making a downpayment of 20%. Multiply the price of the car by the down payment percentage you plan to make. That is: $30,000 x 20/100 i.e., $30,000 x 0.2 = 6,000 Thus, your downpayment of a $30,000 car would be $6,000. Then, you’ll subtract this downpayment amount from the car’s purchase price. $30,000 – $6,000 = $24,000 |
In this case, you’ll need to borrow $24,000 to finance this vehicle purchase.
| ✅ Pro Tip:
With a car loan calculator, you can calculate the car’s value and the dealer’s interest rate against the loan duration to know your monthly payments. |
Downpayment on a New Car vs. Used Car
Getting a car is a huge commitment, as it heavily impacts your financial situation for years. As a buyer, it’s wise to have a good basis on which one is better to finance based on your budget: a new or used car.
Here’s what to know about new vs. used car loan down payments:
New Car
New vehicles depreciate faster, so a downpayment of 20% or above protects you from owing more than the car is worth.
Used Car
Used vehicles have undergone some depreciation. Thus, the lender doesn’t have to worry about offsetting the initial depreciation caused by selling a new car.
You can make a downpayment of less than 20%, as lenders accept a smaller downpayment for older cars.
| ???? Note:
Applying for an auto loan with bad credit may be difficult but possible. This is because lenders see you as a high-risk borrower. However, you can make a downpayment to increase your chances of approval. |
Benefits of Making a Downpayment for a Car
Making a downpayment on a car loan has several perks that make it worthwhile. The more you can pay upfront, the better off you will be, especially in the long run.
Below are some benefits of making a car loan downpayment in Canada:
1. Lower interest rates
A higher downpayment reduces the interest rate the lender will charge on the auto loan since the loan amount is small. The smaller your loan amount, the lower your interest rate.
2. Low monthly payments
Making a sizeable downpayment reduces the amount to borrow to finance your car. Getting approved for an auto loan may be easier with a smaller loan amount.
You can never negotiate for a better car loan rate since your loan amount is smaller. The lower interest rate will reduce your monthly payments, making your loan more affordable.
3. Increased Equity
Your down payment can affect your ability to qualify for a car loan. A larger downpayment means greater equity in the vehicle. Equity refers to the difference between the value of your car and your loan balance.
A sizeable down payment protects you from paying more for your vehicle than it’s worth. High positive equity in the car increases your chances of financing vehicles, even the expensive ones.
4. Higher chance of loan approval
You can easily acquire an auto loan when you make a large downpayment. Lenders prefer giving out car loans to clients with sizeable downpayment, as they see them as lower risks.
They are confident that such clients will complete their payments at the end of the loan period.
| ????Did You Know?
You can put zero downpayments for a car. This is uncommon, but clients can put zero downpayments on a car if they have high credit scores. However, it has disadvantages:
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Bottom Line
Buying a car is a huge but necessary expense; thus, going for an affordable one is a good step.
Making a sizeable downpayment on a new or used car can save you money in the long run. It helps to reduce your loan amount and qualifies you for a lower interest rate, which leads to lower monthly repayments.
It would be best to save enough money to make a downpayment to avoid incurring more costs.
FAQ on Average Car Loan Downpayment in Canada
Can I use my credit card for a down payment?
You can use your credit card for a downpayment, but it should be your last resort, as it has very high-interest rates on balances held forward. Note that not all lenders accept credit cards as a source for a downpayment.
Should I include taxes and fees in my down payment?
You can. However, if you plan on including taxes and fees as part of your loan amount, you must calculate your down payment based on them.
Can I buy a car without a down payment?
You can buy a car with no down payment, but it’s not a good financial decision, as you’ll have to take out a larger loan. Zero downpayment implies no equity in your car, leading to you owing more than the car’s value due to depreciation.
How does a down payment affect my car depreciation?
New cars typically lose between 20% to 30% of their value within the first year of purchase and still lose between 10% to 15% in the following years. A downpayment adds equity to your vehicle; your equity also grows as it increases.
