The best way to buy a car is to pay cash. Financing a car is usually a means to buy more car than you can actually afford.
With that disclaimer, I know the vast majority of people won’t pay cash for their cars. It takes time and discipline to save up the money, you have to buy less car than you could if you got a loan, and you have to wait.
If you are dead set on financing a vehicle anyway, let me encourage you to make as much of a down payment as you can afford.
There are at least three good reasons to make a down payment:
The first is called being upside-down or buried in your car. This just means you owe more than your car is worth. If you put money down, you put yourself in an equity position that makes it possible to sell or trade-in your vehicle at any time. If you lose your job and realize you don’t really need that Lexus, you can sell it to Carmax right now for more than you owe because you put money down.
Another reason to put money down is that banks like to see cash. If your credit has a ding or two, the bank is a lot more likely to give you a loan with more competitive terms if you show you are committed. The risk of you not making a $350 car payment when you put $5,000 cash down is very low.
Finally, dealers like cash. If you want to wheel and deal to get the best price possible but you have no money in the bank, you have one less negotiating tool going for you. You are at the mercy of the dealer and the bank.
Dealers have to do extra work and pay extra fees for customers who are higher risk. Depending on the bank, simply not having money down could be enough to put you in high risk territory. The dealer is thinking of the costs of getting your loan done and paying the fees on top of the minimum profit he has to sell the car for to make money. If you come to the table with a large down payment, you can quickly change the dealer’s perspective.
Cash is still king. For the reasons above and others, let me encourage you to save up a down payment for your next car purchase. You’ll be more secure in your car, you’ll get better terms from the bank, and you’ll get a better deal at the dealership. Why wouldn’t you put money down?