If you’ve been shopping for a new car, you’ve probably noticed advertisements promoting deals with no down payment. But are these promotions real, or are they yet another example of too-good-to-be-true advertising?
To put it simply, yes, it is possible to purchase a car without making a down payment. However, doing so will likely mean paying a higher monthly payment and higher costs overall. So, it’s important to understand the facts before you buy.
How to Buy a Car Without a Down Payment
If you’re hoping to buy a car without a down payment, it’s important to shop around to find the best terms and rates. Begin the process by contacting several banks and credit unions to get pre-approved and see what rates you’re offered. You can also consider online auto loan lenders. Getting pre-approved with banks and credit unions does not obligate you to accept the loan, and it will likely put you in a better position to negotiate at the dealership once it’s time to buy.
Having a strong credit history, low debt, and steady employment are factors that can help you get good terms at both the bank and at the dealership. In either case, be sure that you understand the terms and the total cost of an auto loan before you accept it.
No Down Payment Loan vs. Down Payment Loan
The biggest difference between no down payment financing and down payment financing is that you’ll likely be paying more over time if you don’t make a down payment. This is because there are additional charges, such as registration fees and taxes, on top of the price of the car itself. When you don’t make a down payment, these fees get rolled into your monthly payments. Interest rates on zero-down payment loans also tend to be much higher, often ranging from 12%-22%.
Because no down payment loans often lead to financing a higher amount, it’s easy to end up owing more than your car is actually worth, also known as being “upside-down” on your loan. A large part of this is due to the fact that vehicles depreciate significantly as soon as they’re driven off the lot – usually by about 20% in the first year. This means you could easily end up with a loss if you need to sell your car before you’ve paid it off in full.
In addition to ensuring that you don’t owe more on your vehicle than it’s worth, you can usually get better terms on your loan if you can make even a small down payment.
What If I Don’t Have the Money for a Down Payment?
If you find yourself in need of a new vehicle, but don’t have the money for a down payment, you can use any equity on the car you own towards the down payment. In order to do this, the car you currently own will need to be worth more than any amount that you still owe on it.
So, if you own the vehicle outright and it’s worth $5,000, then you have $5,000 to put towards your new car. But if you have a car worth $5,000 and still owe $2,500 on the loan, you’ll only have $2,500 to put towards your new vehicle. While this functions very similarly to a down payment, it doesn’t require you to have cash available, just your already-existing vehicle.
Even if this doesn’t give you enough money for a significant down payment, it’s a good idea to contribute something upfront. While 20% down is the ideal amount, even a few hundred dollars can make a big difference in the overall cost of the loan.
Are There Any Other Financing Options?
If you’ve explored all of your financing options and still can’t afford the new vehicle you need, consider the following options.
- Purchase a Used Car: Used cars are generally less expensive than new cars, which will lead to lower monthly payments and a lower overall cost. If you do decide to purchase a used car, make sure it’s reliable by getting it inspected by a mechanic.
- Consider a Less Expensive Car: If you can’t afford your first-choice car, consider choosing something less expensive. Even a slightly less expensive car can make a difference in the overall cost.
- Get a Loan Co-Signer: If you’re only able to get loans with high-interest rates because of your credit history, consider asking someone you trust to co-sign your loan to get a lower interest rate. If you do get a co-signer, be sure to share the title ownership and make on-time payments to prevent any disputes.
- Wait to Purchase: Sometimes, the best option is to hold off on making a purchase. Take some time to save up for a down payment to get the best loan terms possible. You may also be able to qualify for a better offer or get a better deal on the vehicle you want with some time.
The Bottom Line
While no down payment loans can be a tempting offer, they usually require higher monthly payments and lead to a higher overall cost. As a result, it’s typically best to consider your other financing options first to find a loan that fits your unique situation.