A common practice car-buyers do is put a down payment on a vehicle. A down payment will lower the loan-to-value (LTV) ratio and principal, lower your monthly payment amount, reduce interest charges and, in many cases, allow you to shorten the loan term. It may seem like money wasted, but, the down payment is actually there to help you. There are ways to buy a car without any money down, and if you're considering buying a car without a down payment, here's what you should consider.
New Cars vs. Used Cars
When it comes to new cars, lenders generally recommend a down payment. But there are cases where you may not need a down payment or when a down payment doesn't make sense (such as a zero-percent loan from a captive finance company). There are also ways you can avoid having to paying out-of-pocket for your down payment on a car loan.
- Negotiations – If you get a good price on the car and the LTV ratio is in check, the lender may not require a down payment. The LTV ratio is determined by taking the auto loan amount and dividing it by the value of the vehicle. For example, if the loan amount is $22,000 and the car is worth $20,000, then your LTV ratios would be 110 percent. You want to try and have an LTV ratio close to 100, but many lenders will finance up to 120 percent.
- Good credit – Some finance companies will offer a loan without a down payment if your credit score is at 700 or above, which is considered good.
- Rebates – Manufacturer rebates can be used toward the down payment.
- Trade-in vehicle – You can use all or part of a trade-in vehicle's equity as the down payment.
If you qualify for a loan on a used car, it's important to not pay more than “book” value. Banks and auto loan companies use Black Book, Kelley Blue Book, and NADA (National Automobile Dealer Association) vehicle valuation guides to determine the value of used vehicles. It’s important to make sure you research any vehicle you're considering at these sites before moving forward with a used vehicle purchase.
If you want a loan, your bank, credit union or an online loan source could pre-qualify you. Doing this doesn’t mean you're obligated to take out a loan, but it helps to see where you stand. If you qualify, then you’re set. But if you don’t qualify it may be due to poor credit.
Bad Credit
In reality, if you have bad credit and don't put a down payment on a car, there aren't many options. If you want to obtain an auto loan without a down payment but have poor credit, there are two ways to do this.
- Utilize lenders – Going to multiple lenders can better your chance of getting the loan you need approved. Because applying for a car loan is free, you can try to get approved with several lenders, such as your bank, your credit union or a dealership, and see what kind of terms you are offered
- Use your Trade-in – Use your trade-in vehicle as the down payment, instead of using out-of-pocket cash.
Buying a Car Regardless of Credit Type
Regardless of credit, a buyer should always put a down payment on a car – unless it's a zero percent loan. It may feel like you’re spending more money at first, but it will pay off in the long run.
CarsDirect can help speed up the car buying process for people in many different credit situations. With our extensive network of new and used car dealers, we can help you get the car and financing you need. Our safe and secure auto loan request form can help you get started today.