There you are sitting at the sales persons desk negotiating your new car deal. The sales person is busy promoting the idea of putting more money down in order to lower your payment, prevent less negative equity, pay less in finance charges, have a shorter term, etc. All of this is true, but their real motivation is to make more money.
The additional gross profit a dealership makes by getting more down payment from you all comes down to how lenders lend. Using this example, let's say a car dealership has a vehicle for sale for $15,000 and that vehicle has a wholesale value of $10,000. I will leave taxes and other fees out of this to simplify this example. A typical automotive lender, for average credit, is going to have a 125% Loan to Value. So in this example the lender would be willing to loan $12,500 against the value of the vehicle. If you had $0 as a down payment, the only way the dealership could get the loan approved would be to lower the sale price to $12,500. I think we all know that the dealership doesn't want to do that, because it's an instant loss of $2500 in gross profit. That's why sales people are so aggressive when it comes to your down payment.
That being said, there are situations where down payment is necessary. If, for instance, you have a lot of negative equity, you'll need to pony up some money to get the "deal inline" with the lenders guidelines. You'd also need down payment if you have major credit problems. The lender will typically want to see a commitment, from you, of 10% down, or in some cases a flat $1500.
So the next time your sitting with your sales person and they're explaining the benefits of additional down payment, it's probably only benefitting them and the dealership. I'd suggest getting off the down payment issue with the sales person, and work on the dealership to lower the sales price by $2500.
All this being said, I do believe putting money down is a good idea. I'd recommend using a down payment that's at least equivalent to your tax, title and license fees. This is to avoid paying any additional finance charges on those fees. Negotitate with the zero down approach out the gate, and focus on the the dealership lowering the sale price of the vehicle. Once the sales price is acceptable to you, then you can talk down payment.
There are lots of tips and tricks to save money when buying a vehicle, this one is by far the least talked about, but one of the easiest for customers, that don't like to negotiate, to use to realize immediate savings.
