Have Your Down Payment Ready Before You Buy a New Car

Last week we talked about the importance of having your financing ready before going to a car dealer. Today I want to cover another form of advanced preparation that?s equally important: have your down payment ready before you buy a new car.

When ever we go into a car dealership?or any business?a series of negations begins. While we might want to believe that buying a car is a single transaction, it?s really a composition of several sub-transactions, including obtaining financing (if necessary), negotiating options or setting a value on your trade-in.

The best chance we have at getting a good deal on the overall purchase then, is to handle as much of the deal before we get to the dealers store?and without his help!

Control as much of the transaction as you can

Have Your Down Payment Ready Before You Buy a New Car
Have Your Down Payment Ready Before You Buy a New Car
Yes, it is a lot easier to simply accept a dealers trade-in allowance, but you can pay a high price for that convenience?at least hundreds, and maybe thousands of dollars. The dealership isn?t selling you a car to be a good business citizen?they?re trying to make as much money as they can. As a matter of self-interest, your job is to deny them that opportunity!

Relying on the dealer to supply a big chunk of your up front cash is giving him control of your finances. He will set the value of your current vehicle and how much cash he will ?allow? you to bring to the table. It is, after all, a trade-in allowance, and not cash in the true sense.

Walking in the door with a checking account full of cash that you procured without the dealers help will give you more control and bargaining power than you?ll ever get by taking advantage of a trade-in allowance. The more of the transaction you can handle on your own, the more control you bring to the table.

The bigger the down payment, the better the deal

For starters, having a large down payment makes you less dependent on financing, and that makes you a stronger buyer. For another, the more you put down, the better the loan terms are likely to be. Finally, in a cash-starved, debt-drenched world, a large cash position commands respect. It?s an indication that you?re in control of your finances and less reliant on any self-styled experts to make your way in life.

Keeping that in mind, consider making the largest down payment you can, even if that means adding some outside savings to the funds from the sale or trade-in of your car. The more you can put down, the stronger your bargaining position.

It works even better with used cars

If a large down payment is a major advantage in the purchase of a new car, it?s even more powerful if you?re buying a used car. The impact of a large down payment is magnified with the purchase of a lower priced vehicle.

By way of example, let?s say you?re buying a new car for $30,000 and you?ve managed to sell your old car to a private party for $10,000. You?ll have what amounts to a 33% down payment for the new car, which is more than most people put down.

But let?s say that instead you decide to purchase a used car for $15,000?now you?re putting down 67%! And you?ll only need a $5000 loan to complete the purchase?that?s less than what a lot of people owe on a single credit card! Do you think that will improve your bargaining position with the dealer?

Assembling the funds

For most car purchases the funds for the down payment come primarily or entirely from the trade-in of an existing vehicle. If you have a car now, this is the obvious source of funds, but in doing so be sure that you?re getting the best value for your equity.

Before doing anything else, go to a car valuation site like Kelly Blue Book to get a clear idea of what your vehicle is worth. It can give you a pretty accurate idea of what your specific vehicle is worth based on the year, make, model, options and market area. If you at least know the value of your car, you?re in a far better position to maximize the cash value you will get for it.

Selling the car yourself directly to another party will offer you the best chance of getting the highest price for the car. If you?re pretty sure you?ll soon be in the market for a new car, try selling it through Craigslist, giving yourself at least 30 days to market it. Once the buyers check clears your bank, you?ll be ready to go to a car dealer and start wheeling and dealing, cash in hand.

If you have no luck selling to another person, Carmax buys cars even if you don?t buy from them. They?ll inspect the car and give you a written offer that will be good for seven days. This will provide you with a window in which you can be negotiating with another dealer for a trade-in. If the Carmax offer is better than the trade-in allowance from the dealer, you can either negotiate a higher value with the car dealer, or go ahead and complete the sale to Carmax.

At a minimum, the Carmax offer will let you know if the dealer offer on your trade-in is a good one.

You?ve heard the term ?cash is king??no where is that more true than in a car dealership. The more of it you have, the better the deal you?re likely to walk out with.

Have you ever accepted a trade-in allowance from a dealership, only to realize or discover later that you could have gotten more money for your old car?

( Photo courtesy of emilio labrador )

23 Responses to Have Your Down Payment Ready Before You Buy a New Car

  1. When I was young and naive, I traded my car into the dealership. I know sell my car to a reliable third-party guy that always offers way more than what the dealership offers.

    I try to pay cash for cars. However, if there is a deal where I can get a discount for using GMAC financing or whatever, I do that, and then pay the car off the following month.

    I will be in the market for a car in a couple months, so thanks for the info!

  2. ET – When it comes to buying cars a lot of us are young and naive–even if we aren’t young and aren’t naive in other areas. The lure of convenience seems to be overwhelming.

    The dealers make it seem so easy too. It’s hard not to fall into their trap once the process gets going. That’s why it’s so important to take care of as much as possible before hand. Getting your loan lined up, getting accurate values and putting the down payment together. Rely on the dealer for any of these and you’ll get less than you deserve.

  3. I love this, “…in a cash-starved, debt-drenched world, a large cash position commands respect. It?s an indication that you?re in control of your finances and less reliant on any self-styled experts to make your way in life.”

    My wife and I own both our cars. We are also putting aside $500/month into our “Next Auto Fund” and plan to pay cash for our next vehicles. It is called the Next Auto Fund because we will not be buying new cars. We are looking to save $10k-12k and will each have a $5k-6k limit.

    For us this is the only way to go.

  4. Matt – That’s an oustanding idea. So many people are so worried about getting the best car they can afford (“afford” meaning mostly with debt) but they miss the point that if they buy a less expensive one they won’t have to be in debt with all that brings. And they’ll have more money to be free in other areas, like living life to the fullest with less stress.

    I’m not a things person, so for me it isn’t hard to buy on the low end and keep my cash flow and savings clear for living life. You’re post today makes a good point on that as well.

  5. I love this post, Kevin!

    I cringe every time I hear people letting the dealer give them a trade-in allowance. They get ripped off every single time. My gosh, folks, take some extra time and sell your old car yourself! The money you save will be worth it.

    All the best,

    Len Penzo dot Com

  6. Thanks Len, that’s the whole message of the post. In fact I just ran into a former car salesman this past weekend who told me that the dealers give you an allowance up front, but add in some other bogus cost on the back so you never even get the promised trade in!

    The more control we can keep from a dealer the better off we are.

  7. Always try to pay large down payment this will help you to easily fulfill further process. As you pay large down payment the installment, Interest etc, get lesser.

  8. The used car market is at the moment a massive market, because of the recession there is a lot of people looking to buy a cheap second hand car. The recession in previous years made the used car industry a massive amount of money.

  9. Great tips Kevin. The last vehicle I bought I put down 50%, and was able to negotiate a really great deal. When it comes down to it cash is king.

  10. Hi Chris–Borrowing has become so common on a car that most of us don’t realize the corner we back ourselves into when we rely on it too heavily. You did yourself a huge favor with a 50% down payment. Was it a new car or used (it works well in either case thought!)?

  11. These are great tips. I think I will be in the market in the next few years as both our cars are getting to the 10 year age and lots of mileage.

  12. Kelley Blue Book is one place to look. There’s also Edmunds True Market Value, the Black Book, and the NADA guide–both the last two are more often used by dealers. 🙂 You have to remember, too, that in MOST states, you only pay sales tax on the net cost of the car at the dealership. So if you have a 6% sales tax, you have to make $600 more on a $10,000 car to break even selling it to a third party!

    We typically get about $300 for our used cars, or the dealer minimum. We keep our cars a REALLY long time. We like to pay cash for our cars, but we don’t tell the dealer this while we are negotiating!

  13. Hi Jenny–If you can keep your cars for at least 10 years you never lose on them. A good friend says it’s always cheaper to fix a car than it is to buy one, and I’ve found that advice to be right on the money. If you’ve “driven your car into the ground”, you’ve gotten your money back and it almost doesn’t matter what you get for it when you sell or trade it in.

  14. It’s a used truck, in fact I bought the truck in 2000 and still drive it to this day. Other than a few minor issues the truck has done great over the last 13 years and I plan to hang on to it for a while yet, because the truck really isn’t going to be worth much if I sell it so why not just hang onto it till the wheels fall off then I can just start driving it on the rims. LOL!

  15. The large down payment is really effective on a used vehicle, not the least of which since you get it paid off quickly. Wow, 13 years, you got your money back on that at least twice! It’s like you’re driving it for free. Even if you have to sink a couple thousand a year into it for repairs it’s still a lot less expensive than a new car.

  16. Kevin – Having been in the automotive industry for years, I can say that your recommendations are SPOT-on. I always tell my friends and family to sell their vehicle to a private party via Craigslist or AutoTrader, and then turn around and use those funds for their down payment. There’s a reason Kelly Blue Book has a separate value for retail versus trade-in value – even the most reputable, honest, aboveboard dealer is only going to give you a wholesale price for your trade-in; otherwise, they can’t make any money off of it. The difference between selling it yourself and taking the dealer’s trade-in offer is almost always several hundred dollars, and can easily be over $1000 for a late-model used car.

    I love that you say that buying a car is really a series of sub-transactions – so true!

  17. Thanks Taylor! You’ve done a good job outlining why the dealer will/can never give full retail value on a trade in. It’s the reality of the auto business. We need to understand that fact when disposing of our old cars. My thought is that you should at least attempt to sell yourself before going the trade in route.

  18. Obviously, selling your current car yourself gets you more money, but one thing that needs to be considered is the safety aspect. You can advertise your car for sale, but you have to field and screen the prospective buyer yourself and when they come for a test drive do you go with them? Going anywhere with a stranger is risky. Or do you let them drive the car alone? Will you ever get the car back? Of course, you and another person might go with them so the buyer is outnumbered if they have harmful intent, but this is not always possible. And if you are a single woman, you know the risks. So while you are losing money for the convenience of driving you car to the lot and leaving it there in order to drive home in your new car, sometimes that may be the best option.

  19. That’s an excellent point Kathy! But I wonder if safety is actually a more important reason for trading in to a dealer, or is it more about convenience? (There’s something to be said about that too, of course!)

  20. I understand how paying in cash saves me money on the car, and with certain deals, but how does it save me on a 10 year-old used car that was discontinued 7-8 years ago? Any I’m looking at priced decent sell in less than a month,and often in just a few days. I’m a banker, I understand this isn’t most people, but I don’t carry debt, and I have excellent credit. I just want to know how cash gives me better leverage than a credit card as long as it’s obvious to them I treat it like cash. Or they’re welcome to run my credit if it gets me a better price.

    When I keep hearing the price is firm, and I know it’s going to sell very quickly, how do I gain leverage on the price? I feel like it conveys a better handling of my money that I was recently out of work for over 2 years from a serious illness and I’m debt-free even though I have excellent credit and only a 16-20% downpayment. I don’t have to wait to save money, I can put it on a credit card, pay them a 3% fee and still come out ahead in 3 year or lose $150 at most.

  21. Hi Ed – I would think that paying cash would be the strongest leverage of all. With a credit card advance – which is not the cheapest way to borrow money – they might assume you don’t qualify for an auto loan. But who knows?

  22. had a quistion? i have $3000 for a down payment found a car for $11,500 do i pay tax on the $11,500 or $8,500 from a dealer

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