As you know, auto loans are loans taken out by borrowers to help pay for the purchase of automobiles. Most car loans require borrowers to make a down payment using their own resources to cover a small portion of the automobile’s sales price. In comparison, no money down auto loans either waive this requirement or only need borrowers to make a very small down payment. As a result, vehicles purchased using auto loans with no money down are financed either entirely or almost entirely using debt rather than a combination of debt and personal resources.
No Money Down Car Loan Requirements
No money down car loans, also known as no down payment auto loans, are not available to everyone who asks, because creditors are unlikely to extend that degree of trust to all potential borrowers. Individuals interested in securing such loans will typically need a good credit rating, plus the usual requisite documentation such as pay stubs and proof of employment. It is not necessarily impossible for people to get an auto loan with bad credit and no money down, but they will have to pay higher interest rates than their counterparts and possibly be forced to meet other conditions such as finding loan co-signers.
Upsides and Downsides
The most important advantage to this type of financing is, of course, the lack of a down payment. Individuals who have encountered short-term cash shortages but still need to buy automobiles may find a no money down auto loan perfectly tailored to their financing needs. However, it is important that these people are aware of the downsides to such loans before taking them out.
Most of the problems with zero money down car loans can be traced to the fact that creditors consider them riskier and thus more likely to be defaulted upon than most comparable financial products. Their belief is based on the fact that such loans appeal most to borrowers with shaky financial circumstances. Worse yet for creditors, they cannot recoup their losses even if they repossess the automobiles upon default because almost all vehicles rapidly fall in value once they are sold and used.
Given these circumstances, creditors need assurances that their money will be protected before they can be persuaded to lend to interested borrowers. Often, these assurances take the form of loan conditions such as using the purchased automobiles as collateral or harsher repossession policies. But most commonly, the compensation to creditors in exchange for lending under risky conditions is a bigger profit earned through charging a higher interest rate on the loans. At a minimum, creditors will charge a high enough interest rate so that their probable earnings once the higher chance of default has been factored in are the same as the probable earnings on a less risky loan.
Over time, a borrower will almost certainly end up paying more for an automobile by securing a car loan with no money down than by securing a loan that requires a down payment.
Despite their downsides, these auto loans remain useful for people who need to buy automobiles without having the cash on hand to make down payments. So long as they understand and find the increased costs acceptable, these people will find such loans perfect for their financial needs.