Will I Lose My Down Payment if I Sell My New Car?

By Tara Baukus MelloBankrate.com

Dear Driving for Dollars,

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I am not very good at understanding financial matters, and I would like to better understand car down payments. If I put money down on a car and then I decide to sell it soon, would I lose my down payment?

-- Jean

Dear Jean, Let's first talk about depreciation. All new cars depreciate the moment the owner drives the car off the lot because the car essentially becomes a used car instantaneously. It is therefore worth substantially less, even though it may be the current "new" model year and have very few miles on the odometer.

As a result, car buyers who put no money down when they buy a new car -- and especially if they roll in the taxes, title and other fees associated with the purchase into the car loan -- are said to be "upside down" in their car loan, meaning they owe more than the car is worth. To prevent being upside down, people make a down payment, so the amount they borrow is equal or less than that initial depreciation loss.

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Now to your question of losing the down payment if you decide to sell your car: The answer is that you are essentially "losing" the initial depreciation amount whether it is in the down payment or in the car loan.

Look at it this way: If you buy a $25,000 car and finance the whole amount, then you immediately decide to sell the car and it's only worth $20,000, you still owe the remaining $5,000 on the loan. You will need to pay that amount to clear the car loan. If you take the same scenario but put down $5,000 initially, the loan will be clear when you go to sell the car.

In one instance you've paid the $5,000 upfront and in the other, you are paying the $5,000 later. Either way you are "losing" that $5,000 plus the interest associated with that amount if you opt for financing versus a down payment.

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