Automotive

Zero percent financing and deposits

  • Last Updated:
  • Jun 22nd, 2016 12:16 pm
Tags:
None
[OP]
Jr. Member
User avatar
Jun 8, 2012
133 posts
47 upvotes
Toronto

Zero percent financing and deposits

I've never financed a vehicle before, always bought 2 - 3 year old cars cash, but for various reason I want to get a new vehicle and I don't have the money to buy it outright.

I can put down 50% of the vehicle value if I need to but right now the outgoing models are zero percent financing with the discount they are giving on the car.

My question is, do I put down a larger down payment, and take a shorter term, or take a longer term and put down less, either way in the end I end up, over a short or long term, paying the same?
19 replies
Deal Expert
Aug 22, 2011
35619 posts
21675 upvotes
Center of Universe
evilsee wrote: I've never financed a vehicle before, always bought 2 - 3 year old cars cash, but for various reason I want to get a new vehicle and I don't have money to buy it outright.

I can put down 50% of the vehicle value if I need to, but right now the outgoing, 2016 models, are zero percent financing with the discount they are giving on the car.

My question is, do I put down a larger down payment, and take a shorter term, or take a longer term and put down less, either way in the end I end up, over a short or long term, paying the same?
Negotiate the OTR (on the road) price and ensure the monthly payments add up.
[OP]
Jr. Member
User avatar
Jun 8, 2012
133 posts
47 upvotes
Toronto
vkizzle wrote: Negotiate the OTR (on the road) price and ensure the monthly payments add up.
Yes I have. So if I take a 60 months term or a say and 84 month term, at the end of each I pay the same amount in total.

I just want to know if there are advantages to paying a down payment or not, other than reducing my monthly payment amount?
Member
Mar 6, 2008
456 posts
197 upvotes
Ottawa
evilsee wrote: I've never financed a vehicle before, always bought 2 - 3 year old cars cash, but for various reason I want to get a new vehicle and I don't have the money to buy it outright.

I can put down 50% of the vehicle value if I need to but right now the outgoing models are zero percent financing with the discount they are giving on the car.

My question is, do I put down a larger down payment, and take a shorter term, or take a longer term and put down less, either way in the end I end up, over a short or long term, paying the same?
In my opinion, when the finance rate is as low as it is, or 0% in this case, there is no benefit to putting a down payment as large as 50%. That money would be doing absolutely nothing. You're better off investing it and getting a return. You should put whatever down that makes the monthly payment comfortable for you, but within reason. Car loans are open loans. You have the option of paying them off at any time.

The term of the loan is personal preference. Personally, I've always gone with 5 years. I don't see much of a reason going with 3 years, other than to get rid of the loan, and I feel loans that are 72 months+ feel too long.
Deal Fanatic
User avatar
Nov 2, 2013
5533 posts
1416 upvotes
Edmonton, AB
evilsee wrote: Yes I have. So if I take a 60 months term or a say and 84 month term, at the end of each I pay the same amount in total.

I just want to know if there are advantages to paying a down payment or not, other than reducing my monthly payment amount?
It reduces your debt to income ratio, so gives you more credit room in the future.

Aside from that you're better off investing the money you plan to put down.
Consultant, Operator/Trucker
  • Oilfield & Industrial Services, Road Construction
  • Tax & Finance
  • In the Western Canadian Oilfield since 2013
Deal Addict
Dec 30, 2007
1005 posts
190 upvotes
Ottawa, ON
The only reason I'd suggest a down payment with a 0% interest rate (or close to 0%) would be to get monthly car payments to what you can comfortably afford within a reasonable term. If you plan to keep the car long term, I still would not surpass a 5 year loan term as doing so puts you at great risk of being upside down on your loan (owe more than its worth). This goes beyond selling it, you have to consider that crap happens and you could be involved in an accident that writes off the car, which would leave you with owing money and have nothing to show for it.
[OP]
Jr. Member
User avatar
Jun 8, 2012
133 posts
47 upvotes
Toronto
Thanks I understand.

Another question, for zero percent financing the manufacturer or dealer is paying the interest for you, that's the incentive I believe. So should I expect to get invoice + 3% or not?
Deal Addict
Dec 30, 2007
1005 posts
190 upvotes
Ottawa, ON
evilsee wrote: Thanks I understand.

Another question, for zero percent financing the manufacturer or dealer is paying the interest for you, that's the incentive I believe. So should I expect to get invoice + 3% or not?
It isn't so much paying the interest on your behalf, but rather the manufacturer offers its own financing and offers 0% rates on select models (ie: Toyota has Toyota Financing). You are literally being loaned the money to purchase the car without interest.

And yes, getting Invoice +3% is certainly possible. I purchased a Corolla at 0.49% and essentially purchased the car for Invoice + 2%.
[OP]
Jr. Member
User avatar
Jun 8, 2012
133 posts
47 upvotes
Toronto
Ok, but doesn't the manufacturer sell on the loan to a bank (or similar), no financial institution would take on the risk of waiting on payment if they made no profit?

i.e. the loan to the customer is 20 000, the manufacturer sells it on for 15 000, so they loose 5000.
Deal Fanatic
User avatar
Jul 26, 2007
5463 posts
2992 upvotes
Toronto
If you have a mortgage and paying current rate of 2~3%, it's no brainer to get the zero percent for 7 to 8 years.

What people are suggesting is that they have poor financial stability. Another reason is when it's time for a new car on 5th year, monthly payment vs selling price maybe too low, and you feel ripped off.

If you can handle the long financial liability, 7~8 years is definitely worth it.
Deal Expert
Mar 25, 2005
21902 posts
2718 upvotes
evilsee wrote: Ok, but doesn't the manufacturer sell on the loan to a bank (or similar), no financial institution would take on the risk of waiting on payment if they made no profit?

i.e. the loan to the customer is 20 000, the manufacturer sells it on for 15 000, so they loose 5000.
Generally the debt is funded by corporate bonds and bills that others buy. The financing company has its own P&L and will ensure they at least break even.

I'd take the longest term possible with the understanding that your loan will be underwater at the end. This means you cannot spend all the cash and should keep at least the gap between the balance and the insurance liquidated payment accessible.
Deal Fanatic
User avatar
Nov 18, 2002
7018 posts
615 upvotes
Toronto
evilsee wrote: Thanks I understand.

Another question, for zero percent financing the manufacturer or dealer is paying the interest for you, that's the incentive I believe. So should I expect to get invoice + 3% or not?
The manufacturer takes the hit. Given it's last model year I'd aim for a lot better than invoice +3%. Typically go in well below invoice on those for a car on the lot.
Sr. Member
Feb 20, 2011
605 posts
168 upvotes
downtown TO
ichpen wrote: The manufacturer takes the hit. Given it's last model year I'd aim for a lot better than invoice +3%. Typically go in well below invoice on those for a car on the lot.
if the car is new and in the dealer lot do u still have pay freight
[OP]
Jr. Member
User avatar
Jun 8, 2012
133 posts
47 upvotes
Toronto
Kasakato wrote: Generally the debt is funded by corporate bonds and bills that others buy. The financing company has its own P&L and will ensure they at least break even.

I'd take the longest term possible with the understanding that your loan will be underwater at the end. This means you cannot spend all the cash and should keep at least the gap between the balance and the insurance liquidated payment accessible.
Any chance you can explain that in layman's terms, I don't understand? :|
Deal Addict
Dec 30, 2007
1005 posts
190 upvotes
Ottawa, ON
evilsee wrote: Any chance you can explain that in layman's terms, I don't understand? :|
This may provide some better explanation.

http://www.autotrader.com/car-tips/buyi ... ans-222702

Another part of the equation is this. Ever wonder why car manufacturers offer a "cash purchase" incentive to those that don't require financing? The difference there is your answer as to the "interest".

Two cars, exactly the same, can be sold at the same amount (invoice +3%), but once you account for cash purchase incentives, the purchase price for the person paying cash drops vs. the person financing.
Member
May 14, 2012
383 posts
75 upvotes
PICKERING
Kasakato wrote: Generally the debt is funded by corporate bonds and bills that others buy. The financing company has its own P&L and will ensure they at least break even.

I'd take the longest term possible with the understanding that your loan will be underwater at the end. This means you cannot spend all the cash and should keep at least the gap between the balance and the insurance liquidated payment accessible.
evilsee wrote: Any chance you can explain that in layman's terms, I don't understand? :|
Auto finance companies actually create asset backed securities (ABS), not corporate bonds - but very similar, being a bit pedantic perhaps. Basically, the finance company will bundle your car loan with loans from others and create an ABS. For example if your car was $30,000 and financed over 60 months, you would pay $500 per month. Perhaps 100 other identical loans were also issued. They are bundled into one and sold as a security that pays $50,000 per month for 60 months. The buyer of the ABS will then receive the payments and not the finance company. Taking into account credit risk, the buyer may be willing to pay the finance company say $2.7 million (if they demand a yield of ~ 4% p.a.). In this case the manufacturer would be taking ~ $3,000 hit per car (since they would sell the $30,000 loan for ~ $27,000).

You will be "underwater", i.e. your outstanding loan will be greater than the value of the car at the beginning of the loan, not the end. For example if you finance over 5 years, after 1 year you will owe 80% of the purchase price, but the car may only be worth 70%.

The key to how much to put down is if there is any change in your purchase price with cash vs. finance. If not, then finance with $0 down and for as long as possible. Invest the rest in a guaranteed interest bearing account and you will be ahead (although not by very much given the interest you will get). You can always pay off early if you need to for whatever reason.
Member
Jan 4, 2009
372 posts
69 upvotes
Toronto
dudeexcellent wrote: You can always pay off early if you need to for whatever reason.
What if interest rate is not 0%? For example the finance term is 84 months at 1%, what will happen if I decide to pay everything off after 2 full years? Do I still need to pay the corresponding 1% for the remaining 5 year term?
Deal Fanatic
User avatar
Nov 2, 2013
5533 posts
1416 upvotes
Edmonton, AB
alfredkcp wrote: What if interest rate is not 0%? For example the finance term is 84 months at 1%, what will happen if I decide to pay everything off after 2 full years? Do I still need to pay the corresponding 1% for the remaining 5 year term?
No.
Consultant, Operator/Trucker
  • Oilfield & Industrial Services, Road Construction
  • Tax & Finance
  • In the Western Canadian Oilfield since 2013
Deal Fanatic
Jun 24, 2006
9744 posts
3960 upvotes
irishguy wrote: if the car is new and in the dealer lot do u still have pay freight
Depends on how well you can negotiate I guess.

However, yes, they will still try to charge it, as they had to get it there.

Top