The saga continues as we explain the myths and misconceptions of buying a pre-owned car. This pertains more to car buying as a whole both new and used, but I found it prudent after watching a Tiktok this morning regarding the concept of money down.
None of us want to drop thousands of dollars when we go to the car dealership, be it for service, or a sale. That said, money down is not illegal, it also does not benefit the dealer. In fact, the less money you put down, the more money the dealer makes in the form of a kickback from the bank.
That said, there are instances where if you want to buy the car, it may be required by the bank in the form of "chopping the deal" which I will explain in a subsection, or it may be required in an instance of a lease with no rebates which I will also explain in a subsection.
Pre-Owned Purchasing Exceptions
What is a "chopped deal" - this is a car business term which relates to the bank in which approved you on the vehicle, will not provide the full amount requested. Generally the reason for this is based off of either the structure of the deal i.e. a fair amount of negative equity, the borrowers credit score putting them into a tier that is unfavorable for the amount financed, debt to income, or the car costing more than the bank believes it is worth. (This happens more on speciality cars, less so on the normal stuff)
Banks work off of a general "rate sheet" (a sheet in which if your credit is X you qualify for a rate of Y) as well as a loan to value parameters for each given tier. Tier 1 & 2 clients generally get the best rates, and highest ability to borrow if their income allows. The amount borrowed in relation to value is determined by the LTV or "loan to value" - this number is generally determind as a percentage of JD Power Clean Trade x a percentage. Most banks will not lend more than 120-130% LTV on a tier 1-2 credit score.
An example is - 2020 Chevrolet Silverado, 25k miles. JD Power Clean Trade is $34,850.00 - you are tier 1 (750+ in most cases) giving you the full 130% LTV - allowing you to borrow up to $45,305 against that truck
However, if your score is lower - say a 680 - putting you in most cases as a tier 3, they may only allow 100-110% - meaning you can only borrow $34,850 - $38,335. So, say you put $0 down, and figured 5% tax, and the truck is for sale for $37,995 (because they go off JD Power Trade, this is prior to reconditioning and marketing costs for the dealer) - with $0 down, you would be asking for approx. $40,000.00 - if you are a 680, you may not qualify to buy this truck with 0 out of pocket.
That said, there are plenty of work arounds on this idea that the dealer can use, such as levereging their relationships with the banks, putting more in your trade etc. But if a dealer is asking you for money down, it is generally because they have exhausted all of their options. It is not illegal, and the money does not go to the dealer or the sales person, it is to get the loan to an amount the bank will allow you to borrow.
Leases
In the instance of a lease on a new vehicle, you will see that there are times where money down is required. The reason for this is, unless the manufactuer is running a sign and drive lease event, your first payment is due at the time of signing. On a 36 month lease, the first payment is due the day of, with a subsequent 35 payments remaining after.
Generally, these can be offset by a rebate of some sort if there is one, however many manufacturers leave rebates out of leases in exchange for a more favorable money factor or rate as it were. A true $0 down lease is something that does not really exist without supporting programs. If a dealer is asking you to put down your first payment, it is because the deal can not get funded by the lender without it - leaving you with a reposessionable car, which is no good!
Just some food for thought - down payments are not illegal - the less money down the happier the dealer. But sometimes you need to if you want to leave in a car. Know your facts before you show up!
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