Understanding 100 Percent Financing for New and Used Autos

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The CarsDirect editorial team is dedicated to providing our readers with the latest on new and used cars, expert opinions on which vehicles make the grade, and all the fun stuff in between.


, - May 25, 2016

Drivers who want to get into their dream car without paying any money up front look at 100 percent financing loans or for their next vehicle but it's important to think about how these kinds of specific loan agreements work. They may end up leaving you with a mountain of debt.

Captive lenders (those connected directly to manufacturers) offer 100 percent financing loans to help sell vehicles that are in low demand. Finding a captive lender with a low rate on your preferred vehicle is the easiest way to secure a 100 percent financing loan at a great rate. These captive 100 percent loans do require good credit, with clients who have done previous business with a captive lender getting preference.

What is 100 percent Auto Financing?

In a 100 percent financing agreement, the borrower does not have to put down any money up front. He or she simply makes monthly payments for the entire term of the loan.

Dangers of 100 percent Auto Financing

The problem with this kind of auto loan agreement is that there is more of a chance for what's called “negative equity” on a vehicle. Not all potential car buyers realize that for saving money on auto financing deals, the name of the game is to maximize upfront payment and avoid debt at the end of the loan term, where interest rates may be higher and the buyer will not have enough value in the vehicle to balance against their debt.

If you are considering a used car, or the new vehicle you want does not have a low-APR program, speak to a dealership finance professional, a loan officer at a bank or do research online (at a website like BankRate) to get a gauge for competitive interest rates for no money down loans in your area. Car loan rates vary by region, state and city. Being armed with a little research can save you hundreds or thousands of dollars in interest.

What 100 percent Auto Financing Means To a Lender

To better understand the true costs of 100 percent auto financing, think about it from the lenders perspective. Realistically, an auto financing agreement of this nature shows no ability on the part of the buyer to pay any money for the vehicle up front. In most cases, making a down payment saved the buyer money, so the lender can assume that the buyer could not afford an upfront payment. Not being able to make that down payment shows a lack of ability to save. This leads to a dramatically higher credit risk for a customer who is not likely to have money on hand to continue making those monthly payments in the case of loss of income or some other financial difficulty. In effect, 100 percent auto financing is a kind of catch-22 that is extremely likely to end in bad debt.

While lenders are generally willing to extend a 100 percent financing loan, it may be on their terms. Other banks and credit unions will only finance between 80% and 90% of the MSRP on longer term loans (those greater than 60 months). At the same time, you may be able to receive a 100 percent financing loan over a shorter term. As 100 percent financing loans are a relatively high-risk type of loan, you can expect a higher interest rate than if you were to place a down payment.

Lenders Offering 100 percent Auto Financing

The cruel truth is that if a lender offers 100 percent auto financing, it's because they don't want to lose out on a greater customer base—even if the numbers show that they may never get their full investment back. What this means for the customer is a very high chance of default on the loan, getting stuck with bad credit and a very expensive loan deal at the end of the agreement.

Be prepared to make a down payment. If the terms of your 100 percent financing loan are not favorable, make a down payment. Not only will the down payment help secure financing, it can also lower your interest rate. Typical down payments range between 10 percent and 20 percent of the selling price of the vehicle. If you are financing more than 100 percent of the book value, a down payment not only bring your total advance back to 100 percent but can also lower your interest rate.

100 percent Auto Financing and Your Credit Score

Another liability of a “zero down” loan or a “jumbo loan” is that it will take longer for your credit to recover, since according to most risk ratings, a no-money down auto loan shows the inability to save, as mentioned above.

Come prepared with research into local loan rates and your credit score. Arming yourself with knowledge and knowing what you will qualify for before visiting the dealership can save you time, money and hassles when purchasing a new or pre-owned vehicle. Although low rates are sometimes available on these no money down auto loans, terms can vary significantly, and choosing a short-term 100 percent financing loan can save you hundreds or thousands of dollars in interest.

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The CarsDirect editorial team is dedicated to providing our readers with the latest on new and used cars, expert opinions on which vehicles make the grade, and all the fun stuff in between.


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