Auto Loans and Down Payments
Do you really NEED a down payment when it comes to buying a car? While a dealership or auto park might say that they are happy to work with buyers who have no cash at hand, the truth is such buyers are going to receive the worst purchasing terms.
Let's consider a typical comparison - one buyer with no cash at closing, and another buyer with a down payment. If these two buyers were to close a deal on the exact same make and model vehicle, it is more than likely that the one with the down payment would have been able to negotiate a lower purchase price, a better interest rate and an all around better deal.
Why is that the case? Generally, auto dealerships and sellers make their profit from the initial sale. All new cars were purchased by the dealership from the manufacturer; this initial price is inflated to the amount that the dealership would like to make in profit, with some breathing room for negotiation. When a buyer appears with cash in hand, this means that the dealer or seller is going to be able to receive that cash without dealing with the financing company first. This is the nicest arrangement for them and they reward the buyer by dropping the price of the vehicle a bit. Additionally, the bank or financing company likes to see the buyer committing some of their resources to the transaction and also rewards them with a lower interest rate on the auto loan.
Why is the lower interest rate so important if most loans are for five years or less? Well, let's do an illustration on the two buyers mentioned above. Buyer #1 is without a down payment, and is looking to purchase a car for $22,000. With interest rates ranging between 6.5% and 8%, it is likely that a buyer with no cash up front will receive the higher rate over the life of the loan, and here's how this loan will look: $22,000 for vehicle + sales tax of 6% ($1,320) + licensing and registration ($400) = $23,720. Add to this the five years of interest at 7.75% and the total amount for the vehicle is roughly $29,000.
If we consider the loan for Buyer #2, the one with the down payment, it is going to look something like this:
$22,000 for vehicle + sales tax of 6% ($1,320) + licensing and registration ($400) = $23,720. Subtract the $2,000 down payment ($21,720) and then add to this the five years of interest at 6.5% and the total amount for the vehicle is roughly $25,000.
Interestingly, that initial payment will yield thousands of dollars of savings in interest and is the reason that using a down payment is so important.
