Unfortunately, if you can’t afford a down payment, most banking institutions believe you are a high-risk borrower. If your credit is less than perfect, most institutions charge high interest rates, no matter what type of loan your receive. Without a down payment, you must generally borrow more money, which means it will take longer to pay it back. Interest is charged on an annual basis, and the longer it takes to pay back the loan, the more interest is paid. This makes the actual cost of financing a car with no down payment significantly higher overall. However, there are advantages to this type of financing.
Advantages of a No Down Payment Car Loan
Zero down payment auto loans let people with limited resources purchase a vehicle without having to pay any money up front. On average, a car loses half its value during its first three years. However, since the vehicle has resale value it remains an asset. With proper maintenance and timely repairs your vehicle will retain more of its value over time. As with any other loan, a no down payment auto loan can help you establish or repair your credit. Whether or not a no down payment car loan is a good option depends on each individual situation. For someone without savings and a steady source of income, a no down payment auto loan might be a good choice.
Down payments are typically 20-percent of a car’s value on the lot. For example, a down payment of $2,000 would normally be paid for a vehicle valued at $10,000. A down payment does three things. It reduces the amount the buyer must borrow, puts cash in the pocket of the car dealer, and pays the car salesperson’s commission.
There’s no getting around the fact that a down payment requires the saving of a sizable sum of money. Since that’s not always easy to do, the idea of an auto loan with zero down can be very attractive, even if the borrower ends up paying a higher interest rate.
Finding the Right Terms
Finding a no down payment auto loan isn’t difficult, especially for the internet savvy, but finding one with decent terms can be a challenge. Traditional lenders like banking institutions and credit unions tend to charge the highest interest rates for these types of loans. Online lenders may offer better interest rates, making the purchase of a vehicle easier, with lower monthly payments. If saving enough money for a down payment isn’t possible and no down payment car loans are the only option, it pays to look for the best deal. This is especially true if you need a bad credit auto loan, because your rates will already be higher than average.
Since many car dealerships add an additional two to three percent to the interest on a no down payment auto loan, finding the right terms from an online dealer or getting pre-approved from a dealer, banking institution, or credit union may help balance out the additional interest paid. Dealerships sometimes look at a borrower with a pre-approved loan more favorably because the entire sales process is simpler, and is almost as attractive as a cash sale. As a result, the dealer may offer a better car for less money. Borrowers must seek out all their options and choose the one that’s best for them.