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My 2016 Lincoln lease is up. I'm considering buying it for $25000 and putting $7000 down to meet my finance 60 month payment budget. My Salesman said today that much down is not a good idea as I will have no equity at the end of 5 years. Your thoughts?

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    Let me guess, the salesman is suggesting you roll over into a new lease? – JohnFx May 20 at 21:24
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    Wait what? The salesperson thinks you should put less down to have more equity? If the loan is 5 years you will have 100% equity at the end of 5 years regardless of how much you put down.... – quid May 20 at 21:42
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    @perennial_noob I doubt a CD or savings account will out perform the interest charge on the 60 month car loan in question. – quid May 20 at 22:02
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    Down payments reduce the principle value of the loan and as such the amount of interest paid. I'm not sure what point you're trying to make, because it's not a matter of simply paying the same money now versus later, the smaller loan amount would cause a lesser amount of total money to be paid. So unless your savings account beats the loan rate it is not advantageous to let the money sit and grow because it'll be growing slower than your interest expense; unless you have some other near term liquidity needs. I suspect this salesman makes a bigger commission on bigger loans. – quid May 20 at 22:10
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    To my mind, a 5 year loan on a 3 year old car is a mistake regardless of how much you put down. – prl May 21 at 6:24
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2 bits of advice. Don't ask me any questions about my car. I know it has 4 wheels, and runs on gas. More than that, I don't know (I lied, I know it has a cassette deck), and I don't care. Never take financial advice from a car salesman. Why would you?

The lease is a red herring.

You have identified a car that you are willing to buy for $25,000. You have a 60 month plan to finance it. The more you put down, the lower the payments will be, and the interest rate is almost certain to be high enough that I'd agree with Pete should be avoided, paid down as quickly as possible. If you put $0 down, you will have 0% equity, more or less. $25K down, 100% equity. It's nonsense and a smokescreen in between two gaslights to suggest otherwise. Especially since the goal is to have no debt in 5 years.

What he told you makes zero sense, and you can tell him I said so.

  • Never? Many years ago I sold cars for a couple of months, and I gave plenty of financial advice during that time. I'd like to think it was mostly good... ;) – TTT May 21 at 4:04
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    @TTT Good, but for whom? – glglgl May 21 at 5:09
  • @glglgl - Hehe. Usually for the buyer. The question they most often ask is how much should they put down, and my advice would be solid there based on the rate they could get. There was only one time I lied to a customer and it was because my manager instructed me to. (And I quit a couple of days later when said manager stiffed me on my commission for that sale.) – TTT May 21 at 6:31
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    Thanks for the assist @JoeTaxpayer. The OP has 7k, buy a car for 7k or less and the goal of being debt free is accomplished today. – Pete B. May 21 at 10:50
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    @TTT There is the old rule that dishonest people are dishonest. If the manager told you to lie to a customer, he is dishonest. Stiffing you on your commission is then expected, because he is dishonest. – gnasher729 May 22 at 9:04
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Your salesman is either purposely lying, or is extremely confused. Both parts of the claim are wrong:

...that much down is not a good idea...

Actually, paying the entire amount down would be better to avoid interest. The only time you really ought to purposely put less down than you can afford is if the interest rate is 0%, or if you need cash-flow for an investment with a better return.

I will have no equity at the end of 5 years.

By definition, with a 5 year loan, after 5 years, you'll own the car. So unless the car is worth $0 after 5 years, you will definitely have some equity.

The only thing I can think of is maybe the salesman was confusing leasing with buying. If you were leasing again, then you would have no equity at the end of the lease, and putting a lot of money down is generally a bad idea with a lease.

Final Tip: make sure you shop around to see if you can get a similar car to yours for a better price than your buyout. The only benefits of buying your car is you typically avoid the return fee (approx $400-500) and if you have any expensive damage you won't have to pay to have it repaired.

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    Or taxes. Where I live my cars are leased. Besides a low interest rate - last time I paid cash, I spent half a year arguing with the tax office whether I can deduct it as business expense or not. Lease and magically there is no discussion. And paying around 3% is not bad for a CAPEX->OPEX switch. – TomTom May 21 at 5:22
  • @TomTom - That makes sense if it's a business expense. Though I'm pretty sure this question is about a personal car. – TTT May 21 at 6:11
  • Well, personal is VERY depending on what you DO as a business, you know. Many freelance craftmen... you know... well, obviously not. – TomTom May 21 at 6:50
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There are many variables in your question. Assuming that the $25k cost is equivalent to or less than the residual value, then buying it outright might be a good deal. According to Carfax a new vehicle value drops more than 20% in the first year then loses roughly 10% of value annually for the next four years, which means that the car would be worth as little as 40% of original purchase price. How does the $25k cost compare to that depreciation of your car?

As for putting an additional $7k towards the $25k, that would reduce your monthly payment and overall debt which could reduce your APR. For that $25k you can probably buy yourself a much nicer car coming off a lease, like a BMW or Audi, than to refinance your car.

  • He is buying a luxury car (or maybe an SUV) coming off a lease. – Ben Voigt May 22 at 4:14
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My Salesman said today that much down is not a good idea as I will have no equity at the end of 5 years.

That may be hogwassh or not - it all depends on the guaranteed purchase price. I.e. for what money are you guaranteed to be able to buy the car?

If that is below the target retail value (and yes, I have seen leases where the final purchase is 1USD or so) then there is equity in the value you gain - WHEN YOU BUY THE CAR. If you return it - then obviously you loose it all.

I have multiple cars like that - lease all the way (thanks for taxation benefits) at a low rate (around 3%) with purchase prices after some years that are a joke (i.e. WAAAAAY below real value). Basically I use the lease as financing with some (legal, mostly tax side) quirks to avoid discussions. So yes, my "equity" is a way lower purchase price at the end.

  • I don't see how the guaranteed purchase price has anything to do with why you should put less money down when you purchase a car. (I'm guessing this is the reason for the DV.) Maybe you misread the question? – TTT May 21 at 6:16
  • I think you missed the fact that he’s asking about purchasing the car, not continuing the lease. – prl May 21 at 6:22
  • In case you misunderstood - i am referring to the comment of not building equity. If you can purchase the car for 1 USD then basically you DID build equity. – TomTom May 21 at 6:49
  • Thank you. I like the car, I know the history ie no accidents, floods, etc. I did shop around and saw similar for $2,500 more. The salesperson wanted me to get a newer car. We looked at leases and financing. I think the issue was the car would be 8 years old when paid off. At least I would have a trade in at that time. I have 30,000 miles on the car currently – pmontgomery May 21 at 12:39
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    Re:"My equity is a way lower purchase price at the end". Your lease payment and the "end" purchase price are tied directly to each other. If you lease a car with a low "end" purchase price then that means you had a high lease payment to cover the depreciation of the car. Brands of cars that tend to hold their value usually have low lease payments but the "end" purchase price is high. IOW, unless you lucked into a car that has held its value when it was predicted not to, then your lower purchase price and "equity" came at the expense of higher lease payments; not necessarily a win. – Dunk May 21 at 21:25

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