In discussing the predicament of my prospective client “Irene,” I opined that she made a mistake by giving the dealer a large down payment when she first agreed to buy her car.\u00a0 But last week, discussing the high cost of “gap” insurance, I mentioned that one way to avoid owing more than your car is worth is to increase the down payment.<\/p>\n
So which is it?\u00a0 Is a large down payment good or bad?<\/p>\n
As is so often true in the byzantine world of car finance, it helps to separate out two different functions of a down payment.\u00a0 Or, rather, the functions of a down payment at two different points in a typical transaction.<\/p>\n
The first document you sign in a car deal is the Motor Vehicle Purchase Contract (MVPC), which identifies the car and states a price.\u00a0 The dealer wants to sell you that car, but only if you can come up with a way to pay for it.\u00a0 You, for your part, may want to make sure that the dealer doesn’t sell the car to anyone else in the meantime.\u00a0 You want to hold the dealer to his promise to sell you that particular car.\u00a0 That’s especially important in the world of used cars.<\/p>\n
What makes a promise into a legally binding contract?\u00a0 In legalese, it’s called “consideration”:\u00a0 basically, you give something in order to make the other person’s\u00a0 promise binding.\u00a0 This is the legal<\/em> function of a down payment given at the time you agree on a car.<\/p>\n But the dealer isn’t looking at the down payment in that way.\u00a0 The psychological<\/em> function of the down payment is as a hook to make sure you buy the car on the terms he will offer later.\u00a0 The dealer will request as a down payment an amount that he figures you can’t afford to lose.<\/p>\n He’ll ask for you to pay it right away and write the amount on the contract in the space\u00a0 where it says that you forfeit that amount of money if you decide not to take the car.\u00a0 If you don’t mention an amount, he’ll ask for what he think you can afford to pay… but not afford to walk away from.<\/p>\n But a dollar is enough to be legal consideration.\u00a0 At this point, you want to put down the absolute minimum amount necessary to hold the car, and then only if it is important for you to hold the car.\u00a0 Otherwise, there is no legal requirement for any down payment.\u00a0 It’s all psychology.\u00a0 You want to be able to walk away from the deal and shop elsewhere if any problems arise.\u00a0\u00a0 The dealer wants to make it very hard for you to do that.<\/p>\n If you can’t pay cash for the car, you will then sign some documents arranging for financing.\u00a0 Either you’ll get a loan from a bank or credit union, or if financing will be arranged by the dealer, you will sign, some hours or days later, a Retail Installment Sales Agreement (RISA).\u00a0\u00a0 Either way, at that point it’s in your interest to put down as large a down payment as you can, to minimize the portion to be financed and reduce or eliminate the “gap” between what you owe and what your car is worth.<\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" In discussing the predicament of my prospective client “Irene,” I opined that she made a mistake by giving the dealer a large down payment when she first agreed to buy her car.\u00a0 But last week, discussing the high cost of … Continue reading