Dave Ramsey Says This Common Car-Buying Tactic Is a 'Bad Idea.' Is He Right?

There are important reasons why Ramsey says you shouldn't make this move.

Buying a car is about much more than finding the right vehicle with the features you've been hoping for and the space for your loved ones. It's a major financial transaction and, if you make a mistake, you could end up draining your bank account and coping with ongoing financial stress.

If you don't want to regret your car purchase, you may want to steer clear of this common approach to buying a vehicle that finance expert Dave Ramsey warns about. 

Don't make this mistake when buying your car

Ramsey said that many people make a big error when purchasing a vehicle that could create a lot of hassle for them later. The error has to do with the amount of your down payment when you're purchasing. 

"Plenty of folks make a minimal down payment on a car and get a loan for the rest," Ramsey said. "But that's a bad idea, and it's a big reason why so many car loans wind up upside down."

While many dealers accept loans with small down payments, putting less down means ending up with a bigger loan, as Ramsey explains. This larger loan can have higher monthly payments that make it harder for you to stay within your budget and avoid turning to credit cards to pay for necessities. It can also prevent you from accomplishing other financial goals, like saving for retirement.

A small down payment can also have other consequences, as well. "The more money you owe on your car, the greater the chance that the amount you owe will end up being greater than the value of the car down the road as it depreciates -- especially if you're only making the minimum payments the whole time," Ramsey warned. 

This is what's referred to as being underwater or being upside down on a car loan and it's a major problem. If you have to sell the car, you would need to bring money to the table to pay off the remaining loan balance.

If the car was wrecked in a crash, your insurer would also pay less than you owe on the loan, so if you didn't have coverage for this (which is called GAP insurance), you could end up paying off a loan balance for a car you could no longer drive.

Aim to make the largest down payment you can 

Ramsey is correct to warn a low down payment on a car loan is bad news. As mentioned above, when you make a low down payment, your loan has to be bigger to cover the cost of the car -- so your monthly payments are higher and you're tying up more of your money. And you take a big risk that you will owe more than the car was worth and have to cope with the consequences of that. 

Borrowing a lot of money to buy a car also doesn't make a lot of sense because your car isn't going to increase your net worth over time. Once you've purchased your vehicle, the value starts to drop immediately and continues going down over time. While you still likely need a car, you don't need to add high interest costs and big financial risk on top of the fact that you are buying a depreciating asset. And that's exactly what you'd be doing if you opted to purchase a car with a low down payment.

Ideally, you should aim to put down at least 20% on a vehicle you're buying -- even if that means waiting a little longer to move forward with the purchase or buying a less expensive car. Then, you won't have to worry about the consequences Ramsey has warned about and you'll be able to keep your loan payment affordable so you have more money left over in your monthly budget for more important things.