The Problem with $0 Down
February 21, 2014 / Sara Davis / Finance a Car
The Problem With A Zero Down Payment
We’ve all seen the signs, “Sign and Drive! $0 Down!”
Seems great, doesn’t it?Who wouldn’t want to “sign and drive” away in a great car?
How many other things would you be able to spend your savings on if there was no down payment required? Just think – you could finally take that vacation you’ve always wanted! Before you get too excited, these “sign and drive” deals, not surprisingly, come with a catch. Let’s take a look at how it works.
$0 Down Now, Much More Later
In order to qualify for seemingly generous $0 down payment deals, excellent credit is generally a requirement. Despite your credit score, most dealerships offering “no down payments” do so because they take “hold checks” instead of an up-front payment. This means that over a period of time the buyer is required to provide a series of checks to the dealer on specified dates. However, more often than not this system results in a much higher debt load than simply paying a down payment, as buyers struggle to make their monthly payments and issue timely “hold checks.”
The Price of Convenience
If documented correctly at the time of purchase, this “sign and drive” model is technically not a scam. Unfortunately, many dealerships fail to properly document each aspect of the “hold check” portion of the agreement, leaving car buyers to bear the burden of proof should a legal issue arise. So, what’s the best way to avoid the headache of “sign and drive” deals? Let’s review some tips for cautious car buying.
A Better Alternative to “Sign and Drive” Agreements
Unfortunately, most people who sign up for “sign and drive” deals do so impulsively. The best way to ensure your car purchase experience goes smoothly (and there are no hidden surprises) is to properly prepare. Take these steps before starting your car buying journey.
Create a budget.
Before considering the purchase or lease of a car, your budget needs to be in tip top shape. Start your budget by comparing your expenses to your income. Do you have wiggle room? Enough to afford a car payment, insurance, gas and maintenance? If not, trim down your budget and plan to save before purchasing a car.
Plan to save 20% for a down payment.
Although the average down payment is 11%, the recommended down payment amount is 20%. This means that for every $20,000 you plan to spend on a car, you need $4,000 saved towards a down payment. Without a down payment, you’re likely to fall into the “sign and drive” trap. Saving for a large down payment not an option? Leases can often offer lower down payments and even more flexible payment options.
Do research online.
Prior to heading to your local car dealership, do a substantial amount of research online. Narrow down what car types meet your needs, their features and get a rough idea of ownership costs. How costly is it to insure your desired vehicle? Does your chosen vehicle have a history of safety concerns? Do you need a vehicle with certain features?
Overall, it’s best to do your homework before purchasing a vehicle to avoid the lure of $0 down payment offers.
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