Car Down Payment
More Car Dealer Profit
A large car down payment is sometimes necessary to get approved for a loan, but oftentimes it's simply all about the money!
There you are sitting at the sales persons desk negotiating your new car deal. The sales person is busy promoting the idea of using a larger car down payment in order to:
- lower your payment
- prevent less negative equity
- pay less in finance charges
- have a shorter term
- and on and on and on
All of this is true, but their real motivation is to make more money.
How the dealership profit is increased from you using a larger car down payment all comes down to how lenders lend.
With Your Down Payment
Let's say a car dealership has a vehicle for sale for $15,000 and that vehicle has a wholesale blue book value of $10,000.
Let's leave taxes and other fees out of this to simplify this example.
A typical automotive lender, for average credit, is going to lend up to 125% of the wholesale blue book value of the vehicle.
The technical term for this is a 125% Loan to Value, or a 125% Advance.
So in this example the lender would be willing to loan $12,500 against the value of the vehicle and the dealer would have to get a $2500 down payment from you to keep the deal "in-line."
And by doing so stand to make an additional $2500 profit because of your large car down payment.
With No Down Payment
If you had $0 as a down payment, the only way the car dealership could get the loan approved would be to lower the sale price to $12,500. I think we all know that the dealership doesn't want to do that, because it's an instant loss of $2500 in profit.
Sales people are so aggressive when it comes to your car down payment because they get paid off the gross profit. In fact, they will typically try to get you to use upwards of a 30% down payment.
When You May
"Need" Down Payment
That being said, there are situations where down payment is necessary. If, for instance, you have a lot of negative equity, you'll need to pony up some money to get the "deal in-line" with the lenders guidelines.
You'd also need down payment if you have major credit problems. The lender will typically want to see a commitment from you, of 10%, or in some cases a flat $1500 down payment.
So the next time your sitting with your sales person and they're explaining the benefits of additional down payment, it's probably only benefiting them and the dealership.
To Sum Up
Car Down Payment
All that being said, I do believe in giving a down payment equivalent to, or greater than, your tax, title and license fees. This is to avoid paying additional finance charges on those fees.
I'd negotiate with the zero down approach out the gate, and work on the dealership lowering the sales price. Talk about your down payment only after the sales price is acceptable to you.
There are lots of other tips and tricks you can use to save money when buying a vehicle, but this one is by far the least talked about; although, it's one of the easiest for customers, that don't like to negotiate, to use to realize immediate savings.
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