Should You Buy a Car With No Money Down?

Every day we see and hear advertisements from car dealerships. Some are very cliche with all the hype and over the top salespeople, while others are more subdued and try to appeal to a consumer’s logical side. In any case, their goal is to draw potential buyers into the dealership any way they can.

One tactic that shoppers see more and more often is the offer of ‘no money down’ car deals. Car dealers know that many people live their lives paycheck to paycheck and they also know that in many cases a car purchase is an emotional decision, not a logical decision. For some consumers the lure of driving home a new car with just a few signatures is simply irresistible.

Can a person buy a car with no money down? The answer is yes. With great credit and a decent income a car shopper can definitely buy a car without a down payment. The real question for consumers is: “should you buy a car with no down payment?”

In most cases, the answer is “no”. Having little or no equity position in any major purchase is usually a bad idea. In terms of a car purchase here are the main points to be considered:

1. Financing costs. When a consumer finances a new (or used) car than they are paying interest on the balance of the loan. The lower the loan amount than the less money they will pay over time. Over the course of a typical five year loan the accrued interest can be thousands of dollars. A strong down payment of 10% or 20% will save hundreds (and probably a thousand dollars or more) over the loan term.

2. Financing fees and extras. The only way to truly get a ‘no money down’ loan is to add the fees associated with the purchase into the loan. Every car sale will generate fees like sales tax, licensing fees and dealer documentation fees. These fees add up to approximately 10% to 12% or more over and above the vehicle’s purchase price. In addition, if a consumer chooses to purchase a warranty or accessories the same rules apply, interest charges build up on items other than the actual vehicle.

3. Depreciation. It is no secret that a vehicle depreciates very quickly, especially in the first couple of years. What happens if the vehicle is totaled in an accident or is stolen? Most consumers say that their insurance company will pay for their loss. What many people don’t know is that insurance companies will pay the book value of the vehicle only. This means that when a consumer finances the taxes, fees, warranties and accessories they have a loan balance that is much higher than the replacement price of the car. In fact, it will likely be thousands of dollars higher than the insurance company will pay on a claim. The consumer will be 100% responsible for the balance owed to the bank. Not only will the consumer be responsible for the balance, it may prevent them from purchasing a new car until the old loan is paid in full.

4. GAP Insurance. A consumer can protect themselves from the financial risk stated above with GAP (Guaranteed Asset Protection) Insurance. This will pay the extra amount owed to the lender in the event of a total loss. But the consumer will have to purchase this insurance at the time of sale. This means an added cost of $500.00 to $700.00 or more included into the loan. With 20% or more as a down payment the need for GAP Insurance is greatly reduced.

5. Negative Equity. When all the fees as well as the cost of a vehicle are lumped into a single big loan, it can be years before the loan amount is equal to or less than the car’s value. In fact, it will be around three to three and a half years in many cases on a five year loan. If the consumer wants or needs to trade in or sell the vehicle before that time they will be responsible for the negative equity. This may make it impossible to get out of their current vehicle if the need arises or their financial circumstances change.

Any large purchase should be made with careful consideration and planning. In many cases a vehicle is the second largest purchase people make with their homes being the biggest.
Since a car purchase is such a substantial financial event in most people’s lives it makes good financial sense to plan for it by saving up a strong down payment. A good rule of thumb is to save a minimum of 20% of the total cost. This will in most cases take care of the associated taxes and fees as well as approximately 10% equity in the vehicle. Of course, more is better but not always possible with the rising cost of cars today.

More information available at www.downpayplus.com