Low Payment – High Down Payment
You know those front door deals, packaged in nice borders, a payment you can afford, and colors that appeal to your eyes.
You find yourself running for the door, a BMW for $250 a month, a Mercedes for $275 a month, or any other deal that seems to good to be true.
So what is the catch? This is not hard, it is always a large down payment. $8,000 drive off, $5,500 to start, etc….
Folks, a $35K car is a $35K car, just like a $500K house is a $500K house. No matter what creative financing is applied, at the end of the day the value of the item you are buying is still the same. If you can not afford a $500K house, no matter what financing you apply for, some day you will be responsible for the balance through either higher payments, lump sums, or some other mean. Same with a car, you are paying $250 a month for an expensive car, but you have contributed a tremendous amount of cash.
So, lets say you do see one of these BMW’s for $250 per month with $8,000 down. Why would you do it? You are giving up lots of capital to apply to an asset that will lose 30-50% of its value over 2-3 years. If you are attracted to the low payment, don’t be, you have capital to help subsidize your payments if you can afford the low payment/high down payment combo. Off course this takes discipline, but at the end of the day the money stays in your pocket longer. Yes, eventually it will go away to buy your car, but until then you can do much better things with the cash.
For example, if you can afford $250 per month with lots of money down, why not do $350 per month and subsidize $100 per month? That is $1,200 per year. Lets say that you have enough cash for a four year term, that is $4,800, even in a simple Orange savings account you will earn an extra $200-400 in interest on that cash.
I am always amazed at the ads some companies run, but at the end of the day it is the monthly expense that responds well to people or they would not run these deals. Before you take one of these deals, just ask yourself if that is a smart thing to do with your hard earned cash.
And a reminder, for a lease, I firmly believe you will only get the best deal with the least amount of cash down. If you put a lot of cash down,be prepared to kiss it goodbye. It is to easy for auto dealers to make the down payments virtually disappear. If you don’t put the money down, there are less factors for you to worry about.