topic Re: Big down payment in Auto Loans

Big down payment

Anonymous — Mon, 07 Mar 2016 03:57:00 GMT

Is it smart to put a big downpayment? I guess the rule of thumb is 20% of the cost, but what if my car is totaled? Do I lose my down payment?

I was searching and found this on a different website, which is what makes sense to me.

"For example, if you puchase a car for $20,000 and put $4,000 down you paid $16,000. If the car is totaled and the insurance company pays you $16,000, you paid a total of $20,000. If you put nothing down and the car is totaled, you still pay $20,000. The $16,000 from the insurance company plus the $4,000 you did not give as a down payment. No difference."

Is this all there is to it? I'm not sure if putting 8-10k is the right move. I guess the only difference would be to have a lower m/payment. Any thoughts?

Re: Big down payment

EddieK — Mon, 07 Mar 2016 04:15:50 GMT

There will always be two schools of thought on this subject. I'm on the side of put as much down as you can comfortably afford. And it becomes even more important depending on what interest rate you qualify for. Although I got a 1.74% rate, I put down 30K on an 80K car. Putting little or no down on a depreciating asset only causes more problems if you want to sell or refinance in the future.

Re: Big down payment

Dcyphrz — Mon, 07 Mar 2016 04:17:30 GMT

Not following what the amount financed has to do with your insurance coverage. The characteristics of the vehicle loan are one thing and the insurance coverage, whether good or bad, is another. Least that's as far as my thinking takes me.

Re: Big down payment

Anonymous — Mon, 07 Mar 2016 15:25:24 GMT

@Anonymous wrote:
Is it smart to put a big downpayment? I guess the rule of thumb is 20% of the cost, but what if my car is totaled? Do I lose my down payment?

http://ficoforums.myfico.com/t5/Auto-Loans/What-is-considered-a-GOOD-down-payment/m-p/4482405#M62771

Re: Big down payment

Anonymous — Mon, 07 Mar 2016 05:38:13 GMT

@EddieK wrote:
There will always be two schools of thought on this subject. I'm on the side of put as much down as you can comfortably afford. And it becomes even more important depending on what interest rate you qualify for. Although I got a 1.74% rate, I put down 30K on an 80K car. Putting little or no down on a depreciating asset only causes more problems if you want to sell or refinance in the future.

i never quite understood the whole "save the headache in case you want to sell in the future" line of thinking. You're still eating the same depreciation when you sell; it just so happens you paid it up front. If i put a 90% downpayment on a car, and sell it 12 months later, I won't be upside down on the loan itself, but I'm still losing the same amount of $ on paper at the end of the day.

If anything, no down payment keeps you honest with yourself.

Re: Big down payment

EddieK — Mon, 07 Mar 2016 05:54:32 GMT

@Anonymous wrote:

i never quite understood the whole "save the headache in case you want to sell in the future" line of thinking. You're still eating the same depreciation when you sell; it just so happens you paid it up front. If i put a 90% downpayment on a car, and sell it 12 months later, I won't be upside down on the loan itself, but I'm still losing the same amount of $ on paper at the end of the day.
If anything, no down payment keeps you honest with yourself.

It was easy for me to understand, I'm not paying interest on that 30K, so no, you're not spending the same amount after x amount of time.

Re: Big down payment

Chris679 — Mon, 07 Mar 2016 07:03:03 GMT

I'm of the opinion that the best down payment is no down payment. You accomplish more by taking that money and applying it to the loan after the fact if you think that is the best use of that cash. You gain all of the benefits of the down payment plus you are now way ahead on the loan. I treat it as part of my emergency fund. Also, because you are paying down a significant part of the loan this will help your credit score bounce back quicker from the new loan.

If the apr on the loan is high then I think it's best to pay off as soon as possible. If the apr is low then I like to be 3-6 months ahead and that is plenty for me.

Re: Big down payment

Chris679 — Mon, 07 Mar 2016 07:09:01 GMT

@EddieK wrote:
There will always be two schools of thought on this subject. I'm on the side of put as much down as you can comfortably afford. And it becomes even more important depending on what interest rate you qualify for. Although I got a 1.74% rate, I put down 30K on an 80K car. Putting little or no down on a depreciating asset only causes more problems if you want to sell or refinance in the future.

Ordinarily I would say that investing that 30k elsewhere would be the smart move but 2016 ytd isn't exactly helping my argument.

Re: Big down payment

Dcyphrz — Mon, 07 Mar 2016 07:32:03 GMT

I got a new vehicle in April last year (first brand new one since the mid-90s). I wound up financing exactly $15K of a $32K purchase at 4.05% for 6 years. Paid the last of it off in December. Turns out, I should've just written a check for the truck and been done with it. Cost me $270 in interest over 8 months.

Re: Big down payment

Anonymous — Mon, 07 Mar 2016 14:13:59 GMT

Ulitimately it is a personal finanical decision so there is no right or wrong way to go but my opinon is it depends. If your credit is subprime and you have to take a high interest loan and think you will be stuck with that loan for a long time (cannot refinance once scores and credit is improved) then it probably makes sense to put a larger down payment to reduce your exposure to the interest. This assumes that your higher interest debt is paid off though. For many folks they can get 60-72 month financing for less than 3%. Under those circumstances you probably shouldn't put down a big down because the interest charges for your loan over it's life will be minimal and it probably makes more sense to have the cash in the bank or an investment that earns some interest or can be used to avoid having to use high interest credit cards when emergencies arise. On the issue of losing your down. Buying a new car ensures that if you total it or have it stolen within the first couple of years you will lose period. You either lose your down or you lose by having to pay money out of pocket to pay the finance company because the insurance company will only pay fair market value plus tax and licensing for the car. This is why many people buy GAP insurance that ensures that if you are upside down they will pay the difference. Dealers mark these policies up and they are a source of profit for them. As an example a dealership wanted 700 for a policy and my credit union gave it to me for 199. One option you can employ is to insure the car with someone who provides a program like USAA, for about 10 bucks a year I pay for a additional benefit that provides an extra 20% over the fair market value of the car so they pay 120% to the finance company and anything extra comes to me. This is to help the customer have cash to put down on a new car. Years ago we had a car stolen that was about a year away from being paid off. We got most of what the insurance company paid out but it was still a huge loss because the car had depreciated a tremendous amount and had a ton of life left in it so we were forced to buy a car at a terrible time for us. It is never a good time to total or have a car stolen, the customer always loses.

Re: Big down payment

sccredit — Mon, 07 Mar 2016 14:21:51 GMT

IMO it depends on a few factors.

I purchased DW's car about a year and a half ago. 0.9% APR through Infiniti. I negotiatied cheap GAP through the delaer and put TT&L down. I had the money to put more down but if I can earn 5%+ on the money why not use the bank's cheap money? If something happens to the car I have GAP to cover the shortfall. We keep DW's cars well after they are paid off so trading in or selling wasn't a concern.

If that loan was 7% or 8% I would have made a much larger down payment (or just paid cash).

Re: Big down payment

Anonymous — Mon, 07 Mar 2016 15:16:07 GMT

@EddieK wrote:
@Anonymous wrote:

i never quite understood the whole "save the headache in case you want to sell in the future" line of thinking. You're still eating the same depreciation when you sell; it just so happens you paid it up front. If i put a 90% downpayment on a car, and sell it 12 months later, I won't be upside down on the loan itself, but I'm still losing the same amount of $ on paper at the end of the day.
If anything, no down payment keeps you honest with yourself.
It was easy for me to understand, I'm not paying interest on that 30K, so no, you're not spending the same amount after x amount of time.

re-read my comment. I was referring to the depreciation hit.

Re: Big down payment

Anonymous — Wed, 09 Mar 2016 18:30:00 GMT

I wanted to share my thought process; here is what I have so far.

Scenario A: If I’m getting GAP insurance (up to 50,000 is the limit) then there is no point of putting any down payment because the bank has your back if you total the car.

Scenario B: If I’m getting GAP insurance (up to 50,000 is the limit) and I put a down payment and if the car is totaled, I “lose” the down payment. To put a down payment would make sense if I’m looking to lower the m/payments and risk losing it in a future.

*Assuming in both scenarios that my car is worth less than what I owe when totaled.

Now, Scenario B makes me think the following:

Is the rate of depreciation higher than I would pay in the upcoming years? Does car depreciation stops at one point? Will I remain ahead of the value of my car? So in the case the car is total, will I recuperate some of the down payment?

Example:

Car is worth $40,000

M/payments are $500

Rate 1.5%

Down Payment $10,000

Depreciation 7,000 (app. According to Edmund.com)

In a period of one year

Paid $6,000 (500*12)

Owe $24,000 (30,000-6,000)

Car worth $33,000 (40,000-7000)

Recovered down payment $9,000 (33,000-24,000)

No need for GAP insurance

Something I’m missing? Is the depreciation at the end of the year or rigth after you take it of the dealer lot? I believe the determining factor her is the depreciation as that value is without considering any previous (minor) accident or anything else that would lower the car value even further. Sorry if is a mess; this is the best during work hours.

Re: Big down payment

Anonymous — Thu, 10 Mar 2016 17:06:10 GMT

@Anonymous wrote:
I wanted to share my thought process; here is what I have so far.

Scenario A: If I’m getting GAP insurance (up to 50,000 is the limit) then there is no point of putting any down payment because the bank has your back if you total the car.

Scenario B: If I’m getting GAP insurance (up to 50,000 is the limit) and I put a down payment and if the car is totaled, I “lose” the down payment. To put a down payment would make sense if I’m looking to lower the m/payments and risk losing it in a future.

*Assuming in both scenarios that my car is worth less than what I owe when totaled.

Now, Scenario B makes me think the following:
      Is the rate of depreciation higher than I would pay in the upcoming years? Does car depreciation stops at one point? Will I remain ahead of the value of my car? So in the case the car is total, will I recuperate some of the down payment?

Example:
Car is worth $40,000
M/payments are $500
Rate 1.5%
Down Payment $10,000
Depreciation 7,000 (app. According to Edmund.com)
In a period of one year
               Paid $6,000 (500*12)
               Owe $24,000 (30,000-6,000)
               Car worth $33,000 (40,000-7000)
               Recovered down payment $9,000 (33,000-24,000)
               No need for GAP insurance

Something I’m missing? Is the depreciation at the end of the year or rigth after you take it of the dealer lot? I believe the determining factor her is the depreciation as that value is without considering any previous (minor) accident or anything else that would lower the car value even further. Sorry if is a mess; this is the best during work hours.

the depreciation hit is as soon as you drive off the lot.

the bigger monthly payment thing is a bit of a misnomer. Yes, you're paying more monthly, because you paid less up front. If you're very sensitive to your monthly budget, you can easily take that down payment put it in a savings account, and draw from it on a monthly basis to cover the increased payment difference and not exceed your set monthly budget. At the end of the day you're paying the same amount of principal (of course) by the end of the loan. It's just a question of paying a touch more interest in order to protect your capital by not making a down payment.