How Much Should I Put Down On A Car?

How Much Should I Put Down On A Car?

For the handful of people who actually read my little blog it’s no secret that I binge any and every car-related article I can find.  And not just articles about cars themselves; I really enjoy reading other’s opinions about vehicle shopping, financing, and other important consumer information.  Then, being somewhat arrogant, I like writing out my take on those consumer related articles.

I recently stumbled across this recent post on Jalopnik about downpayments, and found it really informative, but lacking a few key things.  So, before I get into anything, I want to preface this by saying that this is my personal opinion, based on my somewhat limited years working in both automotive finance and sales.

One of the first thing the article gets into is how to use a loan calculator to grasp the full spectrum of your loan… only it doesn’t.  First, for the vast majority of us (read: less than perfect credit), we can’t/don’t know what interest rate we will have until we’ve gone car shopping… and–frustratingly–gone through the whole shopping process.  Sure, you can get pre-approved on a car loan from your local credit union or bank, but even then, there are usually stipulations regarding the year and miles, and most importantly, the Loan-to-Value ratio.  This is an important factor for all lenders and the cause of much frustration to many buyers.

What is Loan-to-Value?

Loan-to-Value is the difference between the selling price of the car and what the bank believes the car to be worth.  Banks typically use Kelly Blue Book or NADA suggested values, and not the vehicle’s ‘retail’ value, but usually its wholesale or lending value, and these are almost universally lower than what the car is selling for.  It’s important to note that neither KBB nor NADA actually sell cars and that markets fluctuate greatly, and neither of the two can really compensate for scarcity of a special model or its desirability.  Here is in Colorado Jeeps and Subarus sell for five to ten percent more than they do in warm, flats states like Texas.

For those with credit scores above 750, most banks will offer to loan out 120-130% of that value, which provides you room to finance the vehicle you want along with all associated taxes–something that can vary quite drastically from city to city here in Colorado–, as well as extended warranties and GAP insurance.  Depending on the price of the car that high loan percentage usually allows for the car and any extras to be fully financed without the need for a downpayment.

The unfortunate reality is that not all of this information is easily accessible.  Sure, you can google your tax rate, but different dealerships have different prices for their extended warranties (something I spoke about in a previous post), and depending on a vehicle’s miles and options, its value can change pretty drastically too.  And this doesn’t even account for trade-in values (whether you have equity in your trade or have to carry over a balance into the new loan).

All of this is important because many lenders offer better rates depending on the overall Loan-to-Value ratio.  Because there are so many variables it is hard to pinpoint an exact figure of percentage one should put down on a car loan.  I am sure, however, you’re probably thinking this all seems really shady, and yea, it can seem this way. It’s in this confusion where the car industry has earned such a terrible reputation over the years.  Preying on people’s lack of understanding and insight is as old as time.

So… how much should I put down??

Now that you’ve had a glimpse of the many moving parts, how do you figure out all of this secure the best loan for yourself?  The safest answer I can give is to really spend the time to come up with a budget you are comfortable with.  While those with new or poor credit should aim for a vehicle on the less expensive side, your options can become more limited, as banks like newer cars.

So, while you might find a fifteen year old Honda for less than ten grand, most banks don’t want to loan money on a vehicle that old because, statistically speaking, the older the vehicle, the higher the chances are that the car might have issues, and an unusable car is a leading reason people default on their loans.

With all of that said, to answer the question about how much to put down, I think the best answer is to look at your budget and make realistic choices about how much you can afford per month and what rates are available depending on your loan term.  I typically like to take the longest term before the rate increases, so I am locked in at a low monthly commitment, and then make extra payments to reduce the amount of interest I will pay.

Are Extended Warranties Worth The Money?

Are extended warranties worth the money?

I’ve spoken about this before but feel it’s something you can never have too much information on.  It’s a pretty safe assumption that we all know at least one person who “knows” warranties are just a scam dealerships use to get more money.  That same person is also the person who can confidently fix any issue that arise in a vehicle.  I thought like that for a long time. But that was also a long time ago, when cars were simple.  Also, the money I “saved” by doing the work myself was washed away by the time I spent and messes I made, so… yea.  To best understand why warranties are a good idea it’s important to understand modern cars.

What Has Changed?

Nowadays, the sheer multitude of advances in safety, emissions, power, and overall efficiency have made all modern cars extremely complex.  Sure, it’s no secret that European vehicles are more expensive to service–not that they are inherently more prone to issues–but because they are the cars pushing the boundaries of what’s possible in a road going vehicle.  Whether it’s the uncompromising blend of comfort, amenities, and mind-blowing off-road capabilities of a Range Rover or the also-uncompromising luxury, safety, and neck-destroying performance of an Audi S6, European vehicles have a clear goal: to do as many thing as perfectly as possible.

This trend is something we see across the entire spectrum of manufacturers.  Even the Japanese marques of absolute reliability like the Toyota Camry and Honda Accord are now loaded with safety, performance, and efficiency features, and while they are still built incredibly well, they’ll never be as indestructible as their older siblings from the ‘80s and ‘90s.  And the reason for the decline in lifespan is not due to less stringent quality standards.  They just have so much more  going on inside and behind the scenes.  And more parts means a higher chance for something to eventually go wrong.

Are Modern Cars Less Reliable?

No… and yes… This may be the most competitive time in automotive history.  If you need any proof of that, just look at the ever increasing varieties of models amongst manufacturers.  One company makes a niche model like a fastback SUV, and everyone else has to follow suit (see: all German SUVs).  And while it may seem like a big, well… pissing contest, it’s actually a really good thing.  Most models in a manufacturer’s lineup are basically the same vehicle, with just some minor changes to the body. All of the electronic and mechanical bits underneath the skin are the same. That means, higher production volumes for engines and transmissions, etc, which typically equates to problems getting sorted out early on.

Even with this high volume approach to building cars, they are still incredibly complex machines.  Anyone remember the struggles of driving cars from the ’80s or ‘90s in the snow? The traction control was basically just a sensor that pumped the brakes–not much help if you weren’t using snow tires.  Now though, cars are self-monitoring almost every aspect of every component in them. Those components are monitoring things like wheel slip, yaw, torque, steering angle, and more, and they’re doing it 100’s of times a second.  A second!  And if one of the 10,000-plus components fail, it’s going to require work.  So, yes newer cars are more prone to periodic issues, but they also do so much more.  If you want to drive a 1992 Toyota Camry with roll-up windows and no A/C for the confidence that the car will never stop running, go for it.  But, just like my old Nokia phone, while it was indestructible, I’d still take the periodic issues with my iPhone XS  over the Nokia all day long–and yes, I have a warranty on my iPhone.

So, yes.  I 100% believe in the value of an extended warranty, but because not all warranties are the same, it’s important for any consumer to do their homework.  Granted, that’s not always the easiest thing to do, so we’ve tried to help as much as possible by being 100% transparent about the details of any policy we sell.  But rather than ask you to just trust us just because we say we’re honest and transparent, we absolutely encourage you to deep dive into our online reviews.  And not just the good ones, but the bad reviews too.  See what people say about the products we offer.  Because, while nobody can be perfect all the time, how they deal with an issue is a telling sign of who they really are.  At least that’s my take.


Redefining Dealerships

Redefining Dealerships

Because car shopping is rarely fun, everyone wants to find the best dealership when shopping for a new or used vehicle.  Nowadays, a growing number of companies are trying to make the vehicle purchasing experience ‘better’ by consolidating all brands into a one-stop-shop–like Carmax–or by simply eliminating the dealership model altogether through online shopping–like Carvana.  While these sound like great solutions to a very real problem, models like these can actually prey upon the modern consumer.

How Much Is Your Time Worth?

I shop online constantly.  $6 for an iPhone cord, check; $23 for a shower curtain with Jeff Goldblum hugging a sloth, done!  $230 for a nice TV, all day! But while online shopping for a new car may work great, purchasing a used vehicle is infinitely more complex.  And in that complexity is both where dealerships have earned such a negative image, and why companies are now exploiting that image to ‘disrupt’ the current business model, which should be a good thing.

The One-Stop Shop

There are roughly eleventy-zillion variables when it comes to purchasing a used vehicle, and most of us don’t have the time to drive all over town to test all the ones we are interested in.  This is where one-stop-shops can take advantage people’s desire for convenience. While a single car lot with one or two of every car seems like a great idea, in application this model has one unavoidable flaw: adequate servicing means.

Modern cars are complex.  And the ability to service them requires specific (and expensive) software subscriptions, certified technicians, and experience with each vehicle.  By focusing on only a limited number of specific cars, a certified technician can not only properly service the vehicle, but can also predict potential issues, and make repairs in the most efficient manner.  And in an industry where the merchandise loses value daily, time literally is money, and technicians can often be pressured to make the car presentable and move on to the next.  Why pay for an experienced BMW master technician when you only sell two three BMWs a month?

The Online Experience

I’ve only been in this industry for six years now, which I think gives me an advantage.  I can still see things from a consumer’s perspective, and I haven’t adopted the “buyers-are-liars” mentality–yes, that’s a real term in this industry– but I am aware of how dealers can cut corners and take advantage of consumers.  Knowing this does make shopping online sound appealing.

For many, buying a car is the second largest purchase they will ever make.  But for the same reasons you look at multiple homes before signing paperwork, why would you look at a car differently?  Big tech companies know how little time you have and how terrible the buying experience often is, and so the new trend of online car shopping uses convenience as their appeal.  But they too still suffer from the same issues as any other dealership, only now there is even less accountability if there are any problems.  A good dealership should both work hard to properly service their inventory and, if a mistake is made, work to rectify it.

The Solution?

This may be a bold title, but rather than ‘breaking the wheel,’ I think the answer lies in transparency.  In nearly every other industry, the push towards small and accountable, locally owned and community driven businesses are what people want.  And with services like Google Reviews and Yelp consumers can learn who they might be dealing with, the traditional dealership model is actually the way to go… sort of.

Independent dealers have the ability to be the best or worst place to purchase a preowned vehicle.  At their best an independent dealer can focus on the cars they know and can prep and service those cars much more efficiently, passing the savings on to the consumer; they can employ passionate, knowledgeable staff, rather than fly-by-night salespeople; and they can hold themselves–and be held–accountable for a mistake which might slip through the cracks.

And (shameless self-promotion alert), like us, a dealer can design their store around a consumer’s needs and spend their efforts on making the dealership a place you actually want to visit, rather than just tolerate.  I think this is what gets to the crux of things.  There’s no danger in being transparent with your customers.  Heck, customers want that, and are more likely to refer their friends and family, write positive reviews, and even buy more cars from you.  This is how we’ve designed our business model, and a quick browsing of our online reviews will show that we might be on to something.