What is the best down payment?
You have spent months narrowing the search for a new car to just one model. You pretty much know what to expect for a price, which dealer has a good reputation. But one thing is nagging you, what is the right amount of money to put down as a down payment if you decide to buy or lease that vehicle?
A word of caution: What makes perfect sense in terms of a down payment to buy a new or used vehicle could be disastrous for a lease deal. Here’s a few tips on how to determine the down payment from an expert at a consumer credit reporting agency and a Midwest new car dealership
Look at your overall finances
Rod Griffin, director of consumer education and awareness at Experian, a consumer credit reporting agency, said you have to look at your overall financial situation to determine the down payment if you plan to purchase a vehicle. The consumer can’t just dive in and use every nickel remaining each month for that car payment.
“You have to have savings set aside for emergencies,” Griffin suggests. “When it comes to a car, I know this from experience, have an emergency fund set aside. I had a truck that once got four flat tires at the same time. You want to make sure your down payment does not cut too deeply into your other savings. If you have kids, grand kids, what are their expenses? It is the whole financial picture.”
Griffin said that months in advance, “you have to look at setting aside money specifically for that down payment. The more down payment you have the less your loan will be and that will help (lower) the cost in the long run. The larger the down payment the better but you need to consider your overall financial situation.”
20-percent rule no longer applies
Not that many years ago a 20 percent down payment typically was required to purchase a new or used car if a loan was planned. Here’s how the purchase price is determined.
The purchase price is the cost of the vehicle, plus taxes, registration fees, and any other costs/fees that are required. Subtracted from the purchase cost is any rebate offered by the automaker, a trade-in (if applicable) and any money the buyer adds to the deal to lower his loan obligation, which combined make up the down payment. The buyer may be required to add money to the deal if a trade-in is unavailable or the loan institution requires a larger down payment due to the buyer’s less than perfect credit history.
Sometimes a buyer may want to boost his down payment by adding several thousand dollars to the deal to reduce his loan obligation. He may want a lower monthly payment, a shorter term, or both. In recent years, the required down payment for a new or used vehicle has dropped to 9 to 12 percent.
Credit score critical
“I think part of it is the economy, and in part, the fact that we are seeing people manage their debts better. Credit scores on average are at a record high which indicates that people are managing their debt obligations as well as or better than they have ever have,” Griffin said.
“Lenders recognize the cost of vehicles are going up. If a person shows they will pay that debt, lenders are willing to take that risk because they are able to accurately predict that you will pay that debt regardless of the size or the down payment that you make.”
Griffin said taking care of your credit history and having good credit scores is important.
“It gives you bargaining power and purchasing power,” he said. However, if the buyer’s “credit score is not particularly strong, you may be required to make a larger down payment. So, having a strong credit score will help you qualify for a larger car loan with less down payment,” he said.
Big down payments on purchases, leases not so much
While providing the largest down payment a person can afford is recommended for purchasing a car or truck, it is a completely different story for a lease vehicle. A consumer should not provide a dollar more than what the dealer requires to lease that vehicle.
For example, let’s say a parent wants to help a daughter lease a compact SUV. The vehicle requires a $2,500 down payment. The daughter quickly realizes she can afford the $2,500 down payment, but the monthly payment is too high for her budget. So, a parent comes to the rescue, adds $4,000 to the lease deal, making the total down payment $6,500.
Let’s say two months later that vehicle is totaled in an accident. If the leased crossover is covered by GAP (Guaranteed Asset Protection) insurance and the lessee’s insurance, GAP will cover the difference between the cash value of a vehicle and the balance owed on the lease.
But what happens to the $6,500 down payment?
“That money is gone,” said a dealer who asked not to be identified. “Don’t put anything down beyond what is required. Accept the higher monthly payment because if the car totaled or stolen the insurance company (and GAP) will make you whole. But you will not get the money back that you put down.”