We’ve discussed why a down payment is important in an earlier post. Now I want to cover the rare situations when a down payment might be a bad idea.

When should you NOT put money down?

If you already have equity – Sometimes you will enter the loan with equity. A paid off trade-in or very high rebates may put you in a very equitable situation from day 1. Simply put, if you’re financing $10,000 on a $20,000 vehicle then you probably don’t need to tie up any cash down on the loan.

If the interest savings aren’t worth it – If you’re financing at a very low interest rate, for example 1.9% or 0%, then it may make more sense for you to invest your cash elsewhere. Just look at how much money you will save in interest over the term of the loan and you will probably see that your cash will earn more money in some sort of investment.

No Money Down

$5,000 Down

This $73 payment difference over 72 months comes to $5,256 in savings. $5,000 of that amount would be your own cash, so you would only be saving $256 in interest costs over 6 years. In most cases, you could invest your $5,000 and make more than $256 within 6 years. Because of the low interest rate, it doesn’t benefit you to pay the cash down.

These are two situations where a down payment might not be a good idea. Feel free to let me know if you can think of any others or if you have any questions or comments!