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I am thinking about getting a new or used car from a local dealer in town. I have worked and saved some money to use as a down payment for it. Some people have told me that I should save nearly all the price of the car before purchasing it, while others have said it doesn't really matter.

The dealer is running a special of 5 years, 0% APR currently as well.

Can anyone give me some advice on how much of a down payment I should be making?

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If and only if by coincidence the car you were already considering from your research includes a 0% finance offer, go ahead a take the financing and save your cash.

If however you are being tempted to a different car, or would spend more than you initially thought were wanted to, 0% financing is just another trick to get more of you money.

Just be honest why you want the car: is it a good price, or does the financing seem like a good deal? Even if you are not paying interest, you are paying principal.

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If you're getting 0% on the financing, it's not costing you anything to borrow that money. So its basically free money.

If you are comfortable with the monthly payments, consider going with no downpayment at all. Keep that money aside for a rainy day, or invest it somewhere so that you get some return on it. If you need to lower the payments later you can always use that money to pay down part of the loan later (check with the dealer that it is an open loan).

If you're not comfortable with the payments at 0 down, put enough down to bring the monthly payment to a level where you are comfortable.

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    "it's not costing you anything to borrow that money" is a great myth in car buying. In most cases, you opt-out of a $2K to $4K price rebate in order to get 0% financing. – Alex B Aug 23 '10 at 15:36
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    @Alex B (and others) - This link will help you figure out the cost savings between lower financing rates vs. cashback: cars.com/go/advice/financing/calc/incentivesCalc.jsp – awshepard Aug 24 '10 at 12:31
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I've run into two lines of thinking on cars when the 0% option is offered. One is that you should buy the car with cash - always. Car debt is not usually considered "good debt," as there is no doubt but that your car will depreciate. Unless something very odd happens or you keep the car to antique status (and it's a good one), you won't make money off of it.

On the other hand, with 0% interest - if you qualify, and remember that dealer promotions aren't for everyone, just those who qualify - you can invest that money in a savings account, bonds, a mutual fund, or the stock market and theoretically make a lot more over the 5 years while paying down the car. In that case, you really only need to make sure you save enough to make the payment low enough for your comfort zone.

Personally I prefer to not be making a car payment. Your personal comfort level may vary.

Also, in terms of getting your money's worth a gently used car in good condition is miles better than a new car. Someone else took the hit on the "drive it off the lot" decline in price for you.

  • Not everyone can afford to pay cash for a car. Car loans seem to be pretty common. – Jack Marchetti Aug 24 '10 at 21:02
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    @Jack - common doesn't make them good. I have yet to see a source of personal finance advice I trust advocating a car loan under any other circumstances than the 0% interest situation I mentioned. Most people can afford to pay cash for a car if it is old, well-used, and cheap enough or they keep their current car long enough to save for the next one. Most people just don't choose that route. – justkt Aug 25 '10 at 12:30
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    @Jack: That is because many people do not understand or have the discipline in saving $$ before they purchase something. Loans enable people to "get it now" and not wait, usualy at extra cost. People also tend to look at a monthly payment instead of what they are really spending as a whole. – Troggy Aug 26 '10 at 23:27
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Do you need the car, or is this an optional purchase for you? Do you currently have a car that is in good working order?

If you can continue to save for the car instead of buying now, you'll be getting interest on what you've saved -- and that's a lot better than 0% financing.

  • It is good to see someone mention one of the more responsible and intelligent ways to buy a car. – Troggy Aug 26 '10 at 23:18
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I'd put more money down and avoid financing. I personally don't think car debt is good debt and if you can't afford the car, you are better off with a cheaper car.

Also, you should read up on the 0% offer before deciding to commit. Here's one article that is slightly dated, but discusses some pros and cons of 0% financing.

My main point though is that 0% financing is not "free" and you need to consider the cost of that financing before making the purchase. Aside from the normal loan costs of having a monthly payment, possibly buying too much car by looking at monthly cost, etc., a 0% financing offer usually forces you to give the dealer/financing company any rebates that are due to you, in essence making the car cost more.

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At minimum, put down the sale price less what insurance would pay if you got in an accident when driving home, OR purchase gap insurance.

This auto loan calculator is fun to play around with. The larger the down payment, the smaller your monthly payments will be. Don't forget to budget insurance and gas! Insurance on a car you make payments on is more expensive.
http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx

A buddy of mine had a string of bad luck and totaled his car a few months after the date of purchase. He learned what it meant to be 'underwater', insurance paid him a few thousand less than the value of his loan. What's worse than having no car, having no car and a loan!

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