For the handful of people who actually read my little blog, it’s no secret that I binge any and every car article I can find. And not just articles about cars. I really enjoy reading other’s opinions about vehicle shopping, financing, and other important consumer information. Then, being somewhat arrogant, I like writing my takes on those consumer related articles.
This recent post on Jalopnik is about down-payments, and it’s really informative. 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 auto finance and sales. I want to be straightforward with this post, so no pictures, no fluff, just substance.
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 don’t know our interest rate until we’ve gone car shopping, and gone through the whole process. Sure, you can get pre-approved on a car loan from your credit union or bank, but even then, there are usually stipulations regarding the year and miles, and most importantly, Loan-to-Value.
Loan-to-Value is the difference between what the selling price of the car is and what the bank believes the car to be worth. Banks typically use Kelly Blue Book or NADA values, and not the vehicle’s ‘retail’ value, but usually its wholesale or lending value, and these are lower than what the car is probably selling for.
For those with credit scores above 750, most banks will offer to loan out 120% of that value, which gives 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.
The unfortunate reality is that none of this information is easily accessible. Sure, you can google your tax rate, but different dealerships have prices for warranties, and depending on a vehicle’s miles and options, its value can change 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 and so much conflicting information, I’m sure you’re thinking: “this all seems really shady.” And to a degree you are not wrong. It’s in this confusion where dealerships have earned such a terrible reputation over the years. Preying on a person’s lack of understanding and insight is as old as time.
And this doesn’t even cover factors like the surprise costs of repairs or service.
So, how do you figure all of this out and protect yourself? I guess my only realistic answer is to do your research. Though car shopping can be painstaking, it can be worth it in the long run if you are willing to take your time and do some research about the dealer. Read their reviews–not just the overall rating, but read the negative ones and see how the dealer responded to them. Learn about their servicing process and how well they know the vehicle they are selling. And ask them about their financing options and process. While nobody can give you accurate information without seeing your credit, how open they are about who they work with and how their process works can reveal a lot about who they are as a company.
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.