Car loans can be acquired for as low as zero down, though this option is not ideal for all buyers.
When you purchase a new car, it’s generally recommended to make a down payment. Putting money down on a brand-new or new-to-you vehicle lowers the amount you have to finance, which can help you pay less interest over time.
You aren’t always required to make a down payment, though. In fact, some car dealerships offer zero-down payment deals, where you can drive off the lot in a new car without paying a single cent upfront.
But while $0 is technically the lowest down payment you can make, it’s not always the best option. Before you purchase a new car, it’s a good idea to weigh the pros and cons of making a big down payment, and understand how it can affect your auto loan terms.
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Most lenders don’t require a minimum down payment. However, the recommended down payment is 10 percent for a used car and 20 percent for a new car.
For a brand-new car, a 20 percent down payment will usually put enough equity into the vehicle to cover the quick depreciation that occurs in the first few months of ownership. That way, the loan amount will not exceed the value of the vehicle.
While 10 percent or 20 percent are common down payment amounts, experts recommend putting as much money down on your vehicle as you can comfortably afford. That might be as high as 50 percent or as low as 5 percent, depending on your financial situation.
Making a large down payment on your auto loan has a number of benefits. Here are some of the reasons why you should consider putting a large amount of money down on your new vehicle:
When you make a bigger down payment on your auto loan, you can qualify for a lower interest rate. Here’s why: Making a sizable down payment indicates that you have sufficient funds to pay off your auto loan in full. It also shows your lender that they will likely be able to recoup the remaining loan balance if you default on the loan. Borrowers who make a big down payment are less risky, so the lender charges a lower interest rate.
Before you can borrow money to buy a car, you must get approved by the lender. When you make a big down payment on your vehicle, it’s easier to get approved for financing. While a large down payment is not a guarantee of loan approval, it can tip the scales in your favor, especially if you don’t have an excellent credit score.
Making a larger down payment on your auto loan not only means you pay less interest, but you also get the added benefit of a lower monthly payment. Depending on the length of your loan, you will pay less each month when you make a bigger down payment.
The moment you drive your vehicle off the lot, it starts to depreciate in value. If you make a small down payment, you might end up with negative equity in your vehicle, which is also known as being "upside down." However, when you make a bigger down payment on a new car, you are more likely to maintain positive equity. Having positive equity has a number of benefits, especially if you want to sell the car or trade it in before it’s fully paid off.
If you can’t afford to make a big down payment on your vehicle, you might be able to take advantage of a zero-down or low down payment deal. These incentives can help you get into a new car without spending much money (or any money) up front.
The main benefit of putting zero dollars down on your auto loan is that you will not have to hand over a large amount of cash for your purchase. You might also be able to buy a vehicle sooner since you won’t need time to save up for a down payment.
However, it’s not recommended to make a zero-down or low down payment unless you truly can’t afford it. Putting nothing down on a new car loan means you have to borrow more money from the lender and pay more in interest over the life of the loan. You also are more likely to be upside-down on your loan for the first few years.
Ultimately, a zero-down payment is not a good way to save money on your auto loan. While you can avoid the initial payment, you will actually pay more over the lifetime of the loan. It’s only a good idea to put zero dollars down on your auto loan unless you cannot afford to put any money down.
If you are considering a zero-down payment option, use these tips to make sure you’re protected.
Since putting no money down on your vehicle means you will likely be upside on your loan for at least the first year,
adding gap insurance is recommended. If you total your vehicle in an accident, gap insurance pays the difference between your car’s diminished value and what you still owe. Many car insurance companies sell gap insurance, or it can be purchased directly from the dealership.
If you don’t have the funds to put any money down on a vehicle, it’s a good idea to choose a vehicle that costs less money. With a cheaper vehicle, your loan principal will be lower, so you will pay less interest.
Your monthly payment will also be lower, depending on the length of the loan. Once you start building positive equity in the vehicle, you can use that and the additional money saved to put money down on a different vehicle.
If you’re struggling to get approved for a loan because you can’t afford a down payment, consider getting a co-signer. A co-signer agrees to take over the payments if you default on the loan. Getting a co-signer can also improve your chances of getting approved for an auto loan if you have poor credit or no credit.
If you don’t have cash on hand for a down payment, think about trading in your old car. The dealership will inspect your vehicle, assess its value, and offer you a trade-in price for it, which can be used as your down payment on the next car. However, keep in mind that the trade-in value from a dealership is often less than you can get from a third-party buyer. To get the most money out of your old car, selling it to a private party might be a better option.
Some lenders have requirements for no-money-down loans. While every lender is different, here are some of the eligibility criteria you might have to meet in order to secure this type of loan.
Most lenders will want you to have consistent employment. You might need to show that you’ve been at the same job for at least a year, or have held several jobs in the same industry. If you don’t have a history of consistent employment, it could hurt your chances of getting approved for a loan.
Your lender will look to see if you have lived at your current place of residence for at least a year. Maintaining a consistent residence shows that you have a stable living situation, which is important for lenders to see. It also indicates that you have been able to make monthly rent or mortgage payments for a long period of time.
Lenders will check your credit as part of a zero-down loan payment application. Specifically, the lender may look for long-term loans in your credit history and the timeliness of payments, along with your credit score.
Lenders will also look at your total outstanding debt, such as personal loans, student loans, and money owed to credit card companies. They will compare this debt to your income to get a debt-to-income ratio. This figure helps lenders determine if you can afford another loan payment on top of your existing debt.
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
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