No money down auto loans help borrowers to finance vehicles without
any out of pocket outlay. They are usually favored by consumers with
good credit scores who don’t want to overcommit their cash. Some
providers specialize in providing them as financing solutions to people
who don’t meet conventional loan requirements.
There’s little doubt that no money down auto loans offer an
immediate cash flow advantage to borrowers. However, that convenience
comes with drawbacks prospective borrowers should carefully consider.
This guide explains the essential facts you need to know to make an
informed and responsible financial decision.
The Lowdown on Down Payments
Down payments usually apply to major purchases. Examples include
things like expensive home furnishings, new or used vehicles, and real
estate. Most people don’t have the means to pay for these purchases in
cash and instead choose to finance them with a loan.
When financing purchases like cars and homes, borrowers usually offer
a small percentage of the purchase price up front. This initial payment
is known as a down payment. According to Kelley Blue Book, car buyers
usually offer at least 10% of the vehicle’s sale price as a down payment.
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Why Do Lenders Ask for Down Payments?
Every loan carries risk, and lenders need to mitigate these risks.
Otherwise, they risk being run out of business by issuing bad loans. If
even a slight disproportion of borrowers default, the lender’s entire
financial situation can destabilize.
Down payments invest borrowers more deeply in the loan, since they
prompt consumers to pony up their own money. Thus, they mitigate risk
for lenders. Down payments also reduce lender losses in the event of a borrower default.
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What Is a “No Money Down” Auto Loan?
A no money down auto loan is a car loan that does not require the
borrower to offer a down payment. They liberate the borrower from the
need to plunk down thousands of dollars in cash up front.
However, that convenience comes at a cost. Borrowers who finance 100%
of the vehicle’s purchase price pay more interest over the life of the
loan.
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Who Qualifies for No Money Down Auto Loans?
There are two main types of no money down auto loans. The first type is designed for borrowers with high credit scores. The second type targets borrowers with limited savings and credit score challenges.
No money down auto loans for borrowers with good credit come with
reasonable terms. They’re a kind of reward for those who qualify. The
second type carries many more risks. Their interest rates are usually
very high, and borrowers who miss payments don’t get much leeway.
In either case, lenders look at three main criteria when evaluating applicants:
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Monthly Income and Spending Habits
Lenders want to make sure borrowers can comfortably afford to make
regular loan payments. Thus, they will request information about your
income.
However, income doesn’t tell the full story. As such, they will also
look at metrics that quantify your relationship with money. These
include your debt to income ratio and your debt to credit ratio.
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Credit History
Your current debt levels only tell part of the story. Lenders will
also dig into your credit history for clues about how much risk you may
pose.
One thing they’ll look closely at is your credit score. They’ll also
examine other loans you’ve taken out to see how you handled your
repayment obligations.
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Your Choice of Vehicle
Some lenders also consider the characteristics of the vehicle you’re
seeking to buy. In this sense, they’ll try to answer two key questions.
First, they’ll consider whether the vehicle fits your financial
profile. For instance, they’ll likely balk if you’re trying to buy a
pricey sports car on a meager salary. Second, the lender will also look
at whether the vehicle’s purchase price is a fair reflection of its
market value. Issuing a loan for an asset with a market value below its
sale price carries greater risk.
Source: Nissan
Who Offers No Money Down Auto Loans?
Online lenders and some traditional banks offer no money down auto
loans. However, they are more commonly available through online finance
companies.
Auto dealerships also provide no money down loans through their
financing wings. These tend to carry the least appealing terms and the
highest interest rates. If possible, seek financing from a bank or
online lender before considering a dealership’s offer.
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Advantages of No Money Down Auto Loans
No money down auto loans allow consumers to purchase vehicles without
tapping into their savings. This provides financial flexibility, albeit
for a price. These loans usually carry higher rates than you would pay
if you offered a down payment.
There’s also a hidden advantage of choosing a no money down loan. You
can repurpose the money you would otherwise have committed to the down
payment. If you earn returns on it elsewhere, you can nullify your
higher interest rates or even come out ahead.
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Drawbacks and Pitfalls
When carefully sourced and managed responsibly, no money down auto
loans can deliver healthy financial flexibility. However, they can also
pose significant risks. In some cases, these risks can outweigh the
accompanying advantages. This is especially true of loans targeting
borrowers with low credit scores and little cash savings.
With that in mind, also consider these potential disadvantages:
- They usually carry higher interest rates.
- You will not have any initial equity in the vehicle.
- Your loan’s lifetime costs could add thousands of dollars to the vehicle’s purchase price.
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How to Get the Best Deal
Lenders don’t usually offer negotiable rates and loan terms. Thus,
the way to extract maximum value from the loan is to pay as little as
possible for the car.
There are a few ways to do this. However, you should brush up on your negotiating skills.
Some auto salespeople try to extract as much money as possible out of
their customers. These tips will help you avoid falling prey to their
tactics:
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Watch Your Purchase Price
The easiest way to keep your purchase price down is to target a
cheaper car. Avoid the temptation to overspend on a vehicle you don’t
actually need. Instead, opt for a car you can live with but is still
practical and economical.
Next, be sure to concentrate on what is known in automotive circles as the “out the door price.”
Salespeople often try to center negotiations on biweekly or monthly
payments. This distracts your attention from the vehicle’s actual sale
price. It’s a deceptive tactic that never works to your advantage.
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Skip the Options
Another common sales trick is to offer add ons like extended
warranties and fancy vehicle options. The intent: to increase the amount
of money that comes out of the buyer’s pocket.
Add-ons like extended warranties and gap insurance
sometimes add value. However, dealerships almost always overprice them.
If you want these protections, consider purchasing them through a
third-party provider.
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Trade In Your Current Vehicle
Trading in your current car could lower your purchase price by
thousands of dollars. However, there’s a very important technique you’ll
need to use to get maximum value for it.
Many salespeople will factor in the trade-in when negotiating the new
car’s price. Don’t fall for this, as it’s another example of how
salespeople stack the deck against you. Instead, negotiate its value
separately. Only discuss the new car’s price once you’ve agreed on the
value of your trade-in vehicle.
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Consider Making a Modest Down Payment
Yes, offering a down payment contradicts the entire premise of
getting a no money down auto loan. However, if you have lackluster
credit and little savings, you’ll do yourself a favor by opting for a
conventional loan.
Saving up for even the smallest possible down payment can shield you
from a disadvantageous situation down the road. High interest auto loans
can easily lead to a situation where the sum you owe exceeds the car’s
resale value. The numbers never work out to your advantage in such
circumstances.
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Wrapping It Up
No money down auto loans offer convenience and financial flexibility.
However, they also carry several potentially dangerous pitfalls. As
such, they are usually recommended only to buyers on sound financial
footing.
If you’ve got credit challenges or little savings, you may find
yourself with few other financing options. In this case, tread
carefully. Do your own research and calculations, and make 100% sure you
can afford your payments before signing anything.
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