Edmunds.com suggests providing a 20 percent down payment toward your new-car loan to cover the first year of depreciation. A zero-percent loan that doesn't require a down payment amount may seem attractive, but you should still aim to create equity and obtain a monthly payment that fits your budget.
Zero-Percent Loan Requirements
Check with your loan provider to determine the loan term and requirements of obtaining your zero-percent loan. Most new-car manufacturers require a specific term or a down payment requirement for advertised monthly payments. You may also find that advertised monthly payments do not include taxes or fees, which can cost you thousands of dollars. Ensure that the interest rate offer and loan is obtainable without a down payment before you decide not to provide one. You may find that an advertised car payment increases up to $100 without a down payment.
Budgeting
Some zero-percent offers require a loan term of only 36 months. A short loan term creates a high monthly payment. For example, if you purchase a new car that costs $20,000, expect to pay $556 per month even if you offer a down payment that covers tax and fees. The same loan for 60 months with an interest rate of 5.9 percent results in a monthly payment of $386 per month. To obtain the same payment for a 36-month loan, you'd have to offer about $6,000 for your down payment amount in addition to taxes and fees. Provide as much of a down payment as necessary to obtain a comfortable monthly payment.
Depreciation
Consider your vehicle's depreciation. You can determine your vehicle's present depreciation amount by checking its used car value immediately after purchase using Edmunds.com or the Kelley Blue Book website. Expect to provide a full-coverage auto insurance policy for the vehicle, but be aware that your insurance company will pay your lender only for the vehicle's market value; you are responsible for any additional balance due on the loan. You can't predict an accident, but if you should have one, creating some equity in your vehicle upfront can prove beneficial if you should incur a total vehicle loss.
Considerations
If you can afford to pay for a short-term loan with zero-percent financing, you'll create equity quickly. You probably don't have to offer a down payment. For a longer-term loan with a zero-percent interest rate, consider offering enough of a down payment to create equity. Or, consider purchasing a gap insurance policy, which covers your loan payoff if your vehicle is determined a loss and your insurance payoff isn't enough to pay your loan balance. A gap insurance policy may cost up to $600 but can prove a cheaper alternative to a down payment.
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