The ads appear all the time: “No Credit, No Down Payment, No Problem!”
So yes, you really can buy a car with no down payment. Moreover, if you really need to do so, it’s understandable that you would be tempted to do so. However, we’re here to tell you that there are many reasons why you’d want to avoid taking this type of deal.
Here are a few of them.
You’ll Owe More Than the Car Is Worth
There are a number of factors in play against you in this regard. First among them are the license fees, taxes and other costs usually get rolled into a car loan when you finance. Unless you negotiate a killer price, those are going to push the amount of your loan beyond the actual cash value of the car right off the top.
And, even if they don’t, that first year of depreciation will most certainly leave you behind in the actual cash value vs. balance owed department. In most cases, a new car loses 20 percent of its worth in the first year. This is one of the reasons experts recommend making a 20 percent down payment on a new car loan.
Your Interest Rate Will Be Higher
Lenders consider your willingness to make a down payment a sign of good faith. Finance companies figure you’re a pretty safe bet if you’re buying a car that costs $35,000 (the median transaction price these days) and you come up with a $7,000 down payment (20 percent).
This is particularly true if your credit score is strong as well. With those two factors in your favor, you’ll be offered a loan at a much lower interest rate. Conversely, if you have no down payment and a low credit score, you’ll be looking at an astronomical interest rate — if you can get the loan at all.
Your Monthly Payments Will Be Higher
In addition to the aforementioned advantages of down payments, they lower the amount the lender has to provide to help you get the car. The less you borrow, the lower your monthly payment will be.
This means you’ll be more likely to get a reasonable loan term (experts recommend staying within the 60-month the range or less) and still have an affordable monthly payment. To get an idea of how this works, plug the particulars of your deal into a car loan calculator and play around with the amount of the down payment. You’ll see how it works in your favor quite readily.
You’ll Pay More for the Car Overall
With no down payment working for you and higher interest rates working against you, you’ll need to make the term of the loan longer so the monthly payments will be easier to afford.
However, the more payments you agree to make, the more money you’ll give the lender in interest on the loan. Meanwhile, you’re already paying a higher interest rate and now you’re agreeing to pay it for a longer period of time. This will make the actual price of the car much higher.
So again, can you buy a car with no down payment?
Should you buy a car with no down payment?
Only if you have no other choice whatsoever.
Given all of the issues you’ll face — like higher monthly payments, upside down loans, higher interest rates and longer loan terms, all of which will add up to make you pay more for the car than you should — it’s just a bad idea. You’ll be much better off if you can wait and save up even a minimal down payment.