Owning a car is basically a necessity these days. Most of us need it to commute to our jobs, take our kids to school and attend other social activities. But what happens if you need to buy a car right now but don’t have a down payment to put down?
The answer is that it can be tricky, but it’s entirely possible. The question is whether buying a car without a down payment makes sense for you – and whether you should even buy a car in the first place. Below, we’ll consider the pros and cons of buying a car with a down payment and highlight everything you need to know before making that kind of purchase.
1. Assess Your Financial Situation
The first step to take before purchasing a new car is to know the health of your financial situation and know how it will appear to the lender. This includes checking your credit report, verifying your income, and living in one place for at least a year if possible. All of these factors will give you a fighting chance when negotiating with a car dealer.
For example, if you have a very good credit score, you could get financed for a very low interest rate, saving you a lot of money in interest payments over the life of the loan.
Along the same lines, some auto lenders won’t allow consumers to purchase a vehicle without a down payment if they don’t have a good credit rating. So it’s important to know what you’re up against.
You can easily and quickly check your credit report online. Keep an eye out for anything that can affect your credit rating, like closing unused credit card accounts, which can shorten the length of your credit history and reduce your credit score significantly. Having a steady job or regular monthly income will also show the lender you’re a good candidate for a loan.
Regardless of your financial situation, see if you can avoid a long-term auto loan (i.e. stay away from 72 or 84 month loans as you will end up paying high interest rates).
2. If You Choose to Buy With No Down Payment, Shop Around and Negotiate
Some auto dealers will try to use tactics to trick you into settling for a loan with a high interest rate. But don’t be fooled. You don’t have to buy a car from the first dealer you interact with. You can shop around at other auto dealerships, as well as checking with local credit unions, or banks to see if you qualify for a better auto loan directly from them.
You also want to beware of being pressured into buying any extras when you purchase your care — like an extended warranty or credit life insurance.
3. Don’t Rush Into Buying a Car
There are some advantages to buying a car with a down payment (such as lower monthly payments), so it may be in your best interest to wait for a few months while you save money. Or at the very least, you may want to rebuild or repair your credit if it’s bad. This will help you avoid paying more interest and fees than you’d have to if you purchased with no down payment.
Imagine this: you buy a new car, but as soon as you drive the car off the parking lot, the value of your car depreciates by about 20% — in other words, your car is now worth 20% less than what you paid for it.
If you drive the car around for a month and realize you need to sell it, you’re probably only going to get about 80% of the asking price since the car has depreciated in value. If you made no down payment, selling the car will leave you with 20% of your loan unpaid without anything to show for it. This situation is called being “upside down” in a car loan and should be avoided if at all possible.
For that reason, if you’re buying a new car, it’s better to have at least a small down payment, versus none at all, to help counteract the depreciation that occurs.
4. Be Careful About Getting a Loan Cosigner
If you’ve done your research and aren’t rushing into purchasing, and still aren’t able to get approved for an auto loan, you might start to consider co-signing the loan with a family member. In that case, the car loan will end up in their name, with you as the secondary borrower. There are a few possible downsides to this arrangement. One is that if you miss a payment or default on the loan it will not only hurt your credit but also your cosigner’s credit. Having someone’s financial life relying on your own behavior can be stressful. Also, there could be a disagreement over how the car is being used and who is the true owner of the car. Getting into an argument over finances with your cosigner is not likely to be a very happy experience. If you absolutely must do it, then be sure you make all payments on time and keep all records organized and easy to find in case any disagreements arise.
The Bottom Line When You Buy a Car With No Down Payment
You can improve your chances of getting a low interest rate significantly by boosting credit history and proving that you’re a smart buyer. Don’t be afraid to shop around and save money while you negotiate with auto dealers. More importantly, if you can delay buying the car now, take some time to save money and build a better credit score – or look for a cheaper used vehicle. No one needs a top-of-the-line car; we just need something to get us from Point A to Point B.
If you decide to move forward with a purchase, do consider using a down payment of some kind. Any amount of down payment you put towards the loan will mean more money in your pocket every month and more of a chance of getting approved for a loan in the first place.
Image Credit: Thomas Hawk