Have Your Down Payment Ready Before You Buy a New Car

By Kevin M

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—having your down payment in place.

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

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?

Tags: car loans, car purchase, cars, down payment