Buying a car is exciting, but it also comes with (literal) costs. If you plan to finance your purchase, one of the first things you need to consider is making a down payment – a lump sum of money that is a percentage of the car’s value when you purchase it. However, making a down payment isn’t always necessary. It is possible to get a no-money-down car loan, which means you finance the entire transaction upfront.
Do you have to make a down payment on a car?(Source: https://tinyurl.com/ykmfd9dw)
A down payment when buying a car helps reduce the amount you need to borrow to finance the purchase. Generally, the larger the down payment, the less you can borrow.
However, there may be no actual down payment obligation. In some cases, it is possible to buy a car for the full purchase price.
Why get zero-money-down car financing?(Source: https://tinyurl.com/ykmfd9dw)
There are many reasons why buyers consider zero-money-down car financing. These include:
Not having the cash on hand for a down payment. A zero-money-down car loan may be attractive if a down payment is difficult to come by but you need a car urgently.
Want to use the available funds for other purposes, such as other large purchases or financial investments.
Keeping a cash reserve on hand for emergencies.
There is a universal appeal of spending very little at the time of purchase (although, as we will see, this can cost you more in the long run).
Most importantly, buying a car with zero down payment allows you to drive away with a new car with minimal upfront cash outlay.
Considerations for buying a car with zero down payment
While there are potential benefits to buying a car with zero down payment, there are other important things to consider.
Loan Amount
If you don't make a down payment, you will need to borrow more to cover the purchase price of the vehicle you want to buy. Therefore, since you are borrowing more at the outset, you may end up paying more in interest over the life of the loan.
Interest Rate
Lenders generally assume that larger loan amounts are more risky. Therefore, they may incur higher interest rates or require a better credit score to qualify for the loan.
Monthly Payments
Larger loan amounts have higher interest rates, which can increase monthly payments. Larger monthly car payments, in turn, can have a greater impact on your debt-to-income ratio (i.e., your monthly debt payments as a percentage of your income). This can affect your creditworthiness and put more strain on your financial situation.
Upside Down Loans
Buying a car with no down payment also increases the likelihood of having an upside down auto loan, or negative equity. An upside down loan means you’re financing more than the vehicle’s current value, accounting for depreciation. (Remember, new cars generally lose value the minute they’re driven off the lot.)
An upside down auto loan is a common situation when financing a new car, especially early in the loan term, where you owe more than the car is worth. If your vehicle is stolen or in an accident and totaled by your insurance company, you’ll usually only be reimbursed for the fair market value of the car. However, you’ll still have to pay the loan balance, and insurance may not fully cover it if your loan balance is insufficient. Paying a down payment when financing helps reduce the risk of you still owing money on a car you can’t drive.
Tips for Getting a Zero Down Payment Auto Loan
As with any loan, you can only get a zero down payment auto loan if the lender approves you. Some tips that may help improve your chances of qualifying include:
Know Your Credit Score
Credit scores are important, and a good credit score may help you qualify for a zero down payment auto loan. It can be helpful to track your credit score using a free online tool like Chase Credit Journey® and understand the factors that affect your score, such as payment history and credit utilization.
If you have time to improve your credit score before buying a car, this may increase your chances of getting a no-down auto loan.
Shop around
Shopping for a car online and talking to multiple dealers can often help you find the best deal. The lower your car price, the less money you need to borrow and the better your chances of getting a no-down auto loan. Shopping around for financing deals is also another strategy worth considering.
Trade-In
If you have an older car, a trade-in can help you lower the amount you need to finance on a zero-down auto loan. The trade-in value of your old car essentially lowers your finance amount, acting much the same way as a down payment, but without you having to put down any cash upfront. Alternatively, you may be able to get a better price by selling your car privately and potentially use those proceeds as a down payment. Note that in both cases, you will need to settle any remaining debt on your current vehicle with your original lender first and obtain a lien release.
Consider Making a Small Down Payment
Even a relatively small down payment may help get your new car loan done. It will also modestly reduce the amount you owe from the start and may help incentivize you to pay off your loan early.
Summary
If you’re seeking a zero-down auto loan, it helps to understand the pros and cons before you proceed. While the prospect of not putting anything down may be appealing, it could cost you more in the long run. Once you’ve decided on your plan of attack, you can feel more confident finding a car financing option that’s right for you.
