Do You Need A Down Payment To Buy A Vehicle?
"Do I need a down payment to buy the car?" This is one of the most frequent question that my customers ask and while I always recommend to put money down, there are lenders that will allow a well qualified customer to finance the whole amount. Keep in mind that a vehicle is an asset that depreciates and financing all the money will keep you “under water” for a longer period of time. Here are some great benefits when you cover a portion of the financing: 1. You will have BETTER payments. The lower the amount financed the lower your monthly payments. When you cover part of the cost of the car you will be financing less. 2. You will IMPROVE your equity. You will be able to trade in your car without worrying about being “under water” in a timely matter. 3. You will REDUCE the finance charge. Who likes to pay more than it should? I know you don't! A down payment will reduce the interest charged that you pay for the entire loan and it will help get you better rates. 4. You will get APPROVED faster. When you bring money to the table, you show a very strong commitment, you are saying "I want that car, help me get it, I won't let you down, here is $2000" After all they are trusting you based on what they see on a credit report. But why are some people allowed to finance the whole amount and others can’t? Here’s why: Loan To Value. You might’ve heard this term before but what does it mean? Loan To Value or LTV is the ratio of a loan to the value of an asset purchased. In other words, the percentage of the vehicle value that the customer can borrow. Lenders assign this LTV to a customer based on their credit score. I will give you 3 scenarios on how this applies to different credit scores. Scenario 1 John wants to buy a brand new vehicle with a value of $20,000 plus taxes and fees and his credit score is 740. The lender qualifies John as an "A" customer based on his credit history and score. Because of his excellent credit the lender allows John to borrow up to 130% of the value of the vehicle. Here is the math: 20,000 x 130% = 26,000 This means John can add up to 6,000 extra to the value of the vehicle to cover any accessories, taxes and fees. Value 20,000 Taxes. 1,300 Tag. 150 Fees. 599 Total. 22,049 In this case John was able to finance the extra 2,049 without having to put money down. Scenario 2 Jane wants to buy a brand new vehicle with a value of $20,000 plus taxes and fees and her credit score is 650. The lender qualifies Jane as a "B" customer based on her credit history and score. Because of her fair credit the lender allows Jane to borrow up to 100% of the value of the vehicle. Here is the math: 20,000 x 100% = 20,000 This means Jane can finance the full value of the vehicle but Jane will need to cover any accessories, taxes and fees. Value 20,000 Taxes. 1,300 Tag. 150 Fees. 599 Total. 22,049 In this case Jane needs 2,049 to cover the fees and purchase the vehicle. Scenario 3 Jack wants to buy a brand new vehicle with a value of $20,000 plus taxes and fees and his credit score is 575. The lender qualifies Jack as a "C" customer based on his credit history and score. Because of his low credit the lender allows Jack to borrow up to 80% of the value of the vehicle. Here is the math: 20,000 x 80% = 16,000 This means Jack will need to come up with 20% of the value of the vehicle PLUS anything extra like taxes and fees. Value 20,000 Taxes. 1,300 Tag. 150 Fees. 599 Total. 22,049 In this case Jack needs a total of 6,049 to cover the fees and purchase the vehicle. To summarize, a down payment will always help you secure financing. I strongly recommend you cover part of the cost of the vehicle even when you are allowed to finance the out the door amount, this will put you in a better position when you are ready to trade in the vehicle. If you will like to discuss financing options you can contact me here.