Car Buying Tip #5 - Down Payment = A Car Dealerships Gross Profit

There you are sitting at the sales persons desk negotiating your new car deal. The sales person is busy promoting the idea of putting more money down in order to lower your payment, prevent less negative equity, pay less in finance charges, have 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 more down payment from you all comes down to how lenders lend. Using this example, let's say a car dealership has a vehicle for sale for $15,000 and that vehicle has a wholesale value of $10,000. I will 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 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."

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 gross profit. Sales people are so aggressive when it comes to your down payment because they get paid off the gross profit.

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 benefitting them and the dealership. I'd suggest getting off the down payment issue with the sales person, and work on the dealership lowering the sales price by $2500. Once the sales price is acceptable to you, then you can talk 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.

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.

If you want to skip the whole negotiation process and get the guaranteed lowest price check out CarsDirect. With their car buying service you can completely eliminate the need to work with a sales person all together.

I'd also recommend getting your own financing, this way you'll hear direct from the bank what their terms and conditions are. Check out the Loan Center. You can compare multiple lenders, for all credit types, and apply online. It's Free, Fast & Easy.

In the mean time...

Take care and beware,
J the Car Guy