More than 75% of Americans operate a motor vehicle daily. Those who don’t drive may not do so because they live in an area with good public transit, rent or own a property in the center of a city, or perhaps work at home. However, life can change in an instant. A new job, a new addition to the family, or a new commitment can pop up randomly, necessitating the immediate use of a vehicle.
Those who find themselves in this situation but don’t have the necessary funds may be concerned about how to get the right car to fit their needs. While buying a used auto from craigslist or independent sellers is a popular choice, you need to have the full purchase price on hand, which isn’t practical for some people. Luckily, various financing options are available for those who can’t purchase a car outright, even those who cannot pay a down payment. Read on to learn more.
Can I Get a Car with No Down Payment?
Yes, you can get a car without a down payment, though it may be more difficult or more expensive than it would be otherwise.
Getting a car without a down payment is commonly referred to as securing a zero-down auto loan. Whether you get your auto loan through the dealership, a bank, or another lending facility, there’s a good chance you’ll qualify for an auto loan without a down payment.
While the odds of getting a zero-down loan are in your favor, there are some downfalls. When you get an auto loan without a down payment, you may receive a larger loan with a longer payment period. This type of loan also has higher interest rates, often between 12% and 22%. Further, some lenders require weekly or biweekly payments rather than monthly payments.
On some occasions, the interest, when combined with the principal of the loan, can be more than the car is actually worth, a situation known as being underwater on an auto loan. Failing to make payments on an underwater auto loan has severe consequences, with the potential to severely damage your financial reputation. While there are some strategies to get out of an underwater auto loan, the best way to circumvent falling into this situation is to avoid it in the first place.
What Are No-Money-Down Car Loans
A zero-down auto loan helps you get a car when you do not have the cash for a down payment. Instead of taking out a loan on the remaining balance, with a zero-down loan, you’re financing the entire amount of the vehicle.
Another difference is that traditional car loans place heavy significance on your credit rating, while zero-down loans look at your income, debt, and the vehicle’s value. This information helps the lender determine if you’ll be approved for a loan and to calculate your loan’s interest rate.
Down Payment vs. No Down Payment: What’s the Difference
A traditional car loan finances the balance due on the vehicle, while a no-down payment loan is for the entire balance.
For instance, the car you want costs $10,000. With a no down payment loan, you finance the whole $10,000. If you can make a 20% or $2,000 down payment, you are only financing the remaining $8,000 and may qualify for a traditional loan. The interest rate will be more variable, often higher, as lenders will see you as riskier.
In contrast, traditional loans have a lower interest rate and are the preferred loan of more qualified and financially secure borrowers. Therefore, the interest rate is often less, making it ultimately more affordable and taking less time to pay off.
Benefits of Down Payments
Simply put, lenders prefer borrowers who make a down payment because it shows you’re interested in following through with the purchase. Therefore, if you can make a down payment, you have greater odds of being approved for an auto loan.
Down payments also lower your monthly payments and save you cash in the long run. Interest on auto loans accrues daily; the longer your loan term is, the more you’ll pay in interest. By reducing your borrowing amount through a down payment, you’re reducing your loan term and the amount you pay in interest.
Even a Small Down Payment Could Help
A down payment of 20% is standard but not required. You may be able to put much less down and still reap the benefits. It’s also worth noting that your down payment does not have to be cash; a trade-in vehicle can count toward your down payment. Any down payment shows the lender that you’re serious about the purchase and will help you be approved.
The Pros and Cons of a Zero Down Payment Auto Loan
Getting a zero-down auto loan comes with some pros and cons. Let’s take a look at the pros first:
- No down payment is required: While you’ll be paying for the loan in the future, you’re not paying any of it upfront. This lets you funnel your money into other payments like insurance, title fees, and gas for your new car.
- Immediate access: Rather than saving up over months or years, a no-money-down auto loan immediately gets you in a car. This is crucial should a surprise circumstance arise.
- Regular payments improve your credit: Paying regularly on your car loan establishes a good credit history, and your credit score will improve over time. Lenders look kindly on those who make regular payments, especially if you were initially seen as a risky borrower.
The downsides to opting for a zero-down auto loan also deserve to be considered:
- Higher interest rates: A zero-down auto loan usually has a higher interest rate because there is a high loan-to-value ratio. Also, most people who get no-money-down loans typically have low credit scores, leading to a high-interest rate.
- Paying more in the long run: In addition to having a higher interest rate, you’ll pay more for the vehicle because you’re financing the total purchase price.
- Becoming upside down on loan: Owing more for your vehicle than it’s worth is called being upside down on your car loan. This situation creates financial challenges if you want to trade the car in before you’ve paid the car off or if you’re in an accident and the vehicle is totaled.
What Credit Score Is Needed to Buy a Car with No Money Down
Each lender is a little different, and there typically is some wiggle room, but all of them will look at your credit score to determine if you’re a no-money-down loan risk.
A credit score of 680 or higher is considered good credit, and it can help you negotiate a lower interest rate on your auto loan. A score between 580 and 669 can help you qualify for a no-money-down loan, but you might pay higher interest. Any credit score below 580 risks being rejected or facing a higher interest rate.
The good news is that if you can get a car loan, regular and on-time payments will help boost your credit score, putting you in a better position in the future.
Helpful Tips to Buy a Car with No Money Down
If you’re looking to buy a vehicle with a zero-down loan, the following tips can help you make the most of this type of loan while reducing some of the downsides.
Check Your Credit Score
Knowing your credit score and where you stack up sets your expectations. If you have excellent credit, let lenders know and tell them you expect a low-interest rate. You might not get loan approval if your credit is at the lower end of the spectrum. The good news is that working to improve your score can prepare you to secure a loan with better terms when you need it.
Determine How Much You Can Afford
Do the numbers and determine how much you can afford to pay monthly for a vehicle. An auto rate calculator helps you figure in the interest expenses to give you an approximate amount. When you have a number that works, stick with that price.
Don’t Forget Other Expenses
Do not skip the other expenses when figuring out your budget and what you can afford. Owning a car includes additional costs like fuel, maintenance, licensing, taxes, and insurance.
Pay close attention to what insurance your state requires and what your lender requires. Lenders usually require more insurance than your state, so you’ll pay more for insurance coverage.
Gap insurance is one your lender will not require, but you might want. If you end up underwater on your loan and your vehicle is totaled in an accident, gap insurance covers the difference between what you owe and what the car was worth.
Set Up Your Financing in Advance
The further in advance you arrange financing, the more money you will ultimately save. While this is not always practical for those looking for a no-money-down loan, it does have significant financial benefits. Consider shopping around to find the best rate for your situation. If you rely on the dealership to set up the financing, you’ll typically pay more than you would with an outside lender.
Research Lenders
When looking at different lenders, check to see what terms they’re offering. Comparing the monthly payments from different lenders does not give you the whole picture. Make sure you know the interest rate, the length of the loan, and how frequently you’ll make payments.
Consider Using a Cosigner
A cosigner is someone who agrees to purchase the vehicle with you. Usually, cosigners have a strong credit score which will boost your odds of getting approved for a loan. It might also lower your interest rate.
If you stop paying, a cosigner is responsible for the loan, so consider that before your cosigner is added. Repeated late payments can negatively affect their credit score and your own.