How Much Should I Put Down On A Car?
For the handful of people who actually read my little blog it’s no secret that I binge any and every car-related article I can find. And not just articles about cars themselves; I really enjoy reading other’s opinions about vehicle shopping, financing, and other important consumer information. Then, being somewhat arrogant, I like writing out my take on those consumer related articles.
I recently stumbled across this recent post on Jalopnik about downpayments, and found it really informative, but lacking a few key things. So, before I get into anything, I want to preface this by saying that this is my personal opinion, based on my somewhat limited years working in both automotive finance and sales.
One of the first thing the article gets into is how to use a loan calculator to grasp the full spectrum of your loan… only it doesn’t. First, for the vast majority of us (read: less than perfect credit), we can’t/don’t know what interest rate we will have until we’ve gone car shopping… and–frustratingly–gone through the whole shopping process. Sure, you can get pre-approved on a car loan from your local credit union or bank, but even then, there are usually stipulations regarding the year and miles, and most importantly, the Loan-to-Value ratio. This is an important factor for all lenders and the cause of much frustration to many buyers.
What is Loan-to-Value?
Loan-to-Value is the difference between the selling price of the car and what the bank believes the car to be worth. Banks typically use Kelly Blue Book or NADA suggested values, and not the vehicle’s ‘retail’ value, but usually its wholesale or lending value, and these are almost universally lower than what the car is selling for. It’s important to note that neither KBB nor NADA actually sell cars and that markets fluctuate greatly, and neither of the two can really compensate for scarcity of a special model or its desirability. Here is in Colorado Jeeps and Subarus sell for five to ten percent more than they do in warm, flats states like Texas.
For those with credit scores above 750, most banks will offer to loan out 120-130% of that value, which provides you room to finance the vehicle you want along with all associated taxes–something that can vary quite drastically from city to city here in Colorado–, as well as extended warranties and GAP insurance. Depending on the price of the car that high loan percentage usually allows for the car and any extras to be fully financed without the need for a downpayment.
The unfortunate reality is that not all of this information is easily accessible. Sure, you can google your tax rate, but different dealerships have different prices for their extended warranties (something I spoke about in a previous post), and depending on a vehicle’s miles and options, its value can change pretty drastically too. And this doesn’t even account for trade-in values (whether you have equity in your trade or have to carry over a balance into the new loan).
All of this is important because many lenders offer better rates depending on the overall Loan-to-Value ratio. Because there are so many variables it is hard to pinpoint an exact figure of percentage one should put down on a car loan. I am sure, however, you’re probably thinking this all seems really shady, and yea, it can seem this way. It’s in this confusion where the car industry has earned such a terrible reputation over the years. Preying on people’s lack of understanding and insight is as old as time.
So… how much should I put down??
Now that you’ve had a glimpse of the many moving parts, how do you figure out all of this secure the best loan for yourself? The safest answer I can give is to really spend the time to come up with a budget you are comfortable with. While those with new or poor credit should aim for a vehicle on the less expensive side, your options can become more limited, as banks like newer cars.
So, while you might find a fifteen year old Honda for less than ten grand, most banks don’t want to loan money on a vehicle that old because, statistically speaking, the older the vehicle, the higher the chances are that the car might have issues, and an unusable car is a leading reason people default on their loans.
With all of that said, to answer the question about how much to put down, I think the best answer is to look at your budget and make realistic choices about how much you can afford per month and what rates are available depending on your loan term. I typically like to take the longest term before the rate increases, so I am locked in at a low monthly commitment, and then make extra payments to reduce the amount of interest I will pay.