Lots of dealers and other lenders these days are offering cars for no money down. They are advertising these options as great deals for customers, but more often than not, ‘no money down’ deals turn out to be much worse for the vehicle buyer. Car shoppers who don’t understand how interest rates work can be enticed into driving a vehicle off a lot in exchange for nothing but the promise to pay an ever-growing debt. But financial experts can easily point out how these kinds of zero money down offers get American car buyers and families into trouble.
Down Payments and Interest Rates: Use Cash to Keep Interest Low
The experienced car shopper will offer the vehicle’s seller as much cash up front as he or she can afford. That’s because throwing down a cash payment takes a large chunk out of what the buyer will have to pay over time.
Let’s say the vehicle in question is worth $10,000. Assuming an interest rate of about 10%, which is not extraordinarily high for the auto lending market, it can take a driver paying $200 a month over three years to cut that bill in half. By contrast, paying $3000 up front leads to a big reduction in what the driver will owe on his or her car in three years – in fact, using the same math, that vehicle will be paid off entirely in just over three years, while the ‘no money down’ buyer will still have thousands of dollars on his or her plate. Sure, that’s partly because of the original reduction, but it’s also because that entire ten thousand can generate a lot of interest each year, where the monthly payments get used up in paying interest instead of the original debt known as “principal.” When the interest rates are even higher than 10%, as they can be in some financing agreements, the situation gets worse.
The Trap of No Money Down Offers
What happens with these interest-loaded debts that takes so much time to get paid off is that the vehicle’s owner ends up owing much more than the vehicle is worth. Financial experts call this being “under water” on a debt. When this is applied to a large asset, it’s not a nice situation. Where the buyer who offered the down payment in the above situation can easily sell his or her car for its used market value and pay off the rest of the debt, the no money down buyer often can’t. This customer will be stuck driving a “jalopy” and still making those monthly payments. Even a good, solid lease agreement can be better than this kind of indentured servanthood to the car finance company.
Buyers who want to avoid the kind of debt spiral associated with no money down car offers should simply move some money around when it’s time to buy a vehicle. Finding some available assets to provide a down payment can be a very smart way to start an investment in an automobile, something that loses a lot of value in depreciation each year. Many times, getting a better new or used car deal is as simple as doing the math, and not just agreeing to what the salesperson says. Remember, the sellers and those who finance your vehicle want their interest money. It’s out for you to look out for your own interests – paying off the vehicle as soon as possible.