How Your Down Payment On A Car Can Equal Massive Dealer Profits |
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Justin Reynold
2 June 2009
Using a larger down payment on a car purchase can lead to substantially more profit for the car dealership.
Sure there are benefits to buying a car and using a large down payment, but if you skip this car buying advice, then all those benefits belong to the dealership and you'll be left paying for this mistake month after month for years to come...Here's an example:
There you are sitting at the car salesmans desk negotiating your new car deal. The salesman is busy promoting the idea of using a larger car down payment in order to:
*lower your monthly payment
*prevent less negative equity
*pay less in finance charges
*finance for a shorter term, etc.
All of this is true, but their real motivation is to make more money.
The additional gross profit a dealership makes by getting a larger down payment from you all comes down to how lenders lend.
Let's say a car dealership has a vehicle for sale for $15,000 and that vehicle has a wholesale value of $10,000. A typical auto lender, for average credit, is going to lend up to 115% of the wholesale value of the vehicle.
So in this example the lender would be willing to loan $11,500 against the value of the vehicle (I will leave taxes and other fees out of this to simplify this example) , and the dealer would have to get a $3,500 down payment from you in order to keep the "deal in-line."
If you had a $0 down payment, the only way the car dealership could get the loan approved would be to lower the sale price to $11,500. I think we all know that the dealership doesn't want to do that, because it's an instant loss of $3500 in gross profit.
This is why car salesman are so aggressive when it comes to your down payment on a car purchase, because they get paid off the gross profit.
That being said, there are situations where large money down 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 money down if you have major credit problems. The lender will typically want to see a minimum commitment from you, of 10%, or in some cases a flat $1500.
So the next time your sitting with a car salesman and they're explaining the benefits of additional down payment, it's probably only benefitting them and the dealership. I'd suggest getting off the down payment issue and work on the dealership lowering the sales price by $3500. Once the sales price is acceptable to you, then you can talk money down.
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.
All that being said, I do believe in giving a down payment on a car 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 getting that sales price down.