No Down Payment Car Dealerships - You see the ads in the newspapers and you hear them on the radio saying: "Get a new car at Zero Down!" It sure sounds tempting, but are these deals too good to be true? Can you really buy a car without a down payment?
Yes, you can get a car with no money down, but unless you're planning on trading in your current vehicle, this zero down payment offer could mean higher monthly payments and higher costs in the long run. Here's what you need to know.
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Few of us can pay cash for a car up front, so whether you're making a down payment or not, you'll likely use an auto loan to finance your purchase. However, keep in mind that when you buy a car, you're not just paying for the car itself. There are additional costs, such as state taxes and registration fees. The dealership may also charge documentation and transportation costs.
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If you don't make a down payment, this fee is added to the amount you're financing. For example, if you're buying a $25,000 car with no down payment, you can end up financing $28,000 after all taxes and fees are included.
Unfortunately, as soon as you drive out of the parking lot, the value of your new car begins to depreciate, usually by 20% in the first year. If you finance $28,000 and the value of the $25,000 car drops to $5,000 when you drive it off the lot, you now have a car worth $20,000. . . But you owe us $28,000.
When you owe more than your car is worth, that means you're "upside down" on your loan, which is not a good place to be.
Making a 20% down payment helps ensure that even when you factor in depreciation, you won't owe more than the car is worth. Also, a down payment can help you get better loan terms.
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A 20% down payment is ideal, especially if your credit isn't perfect. However, any down payment amount, no matter how small, will help lower your total loan costs and your monthly payments.
Let's say you want to buy a car that costs $20,000 with no down payment. With a 60-month loan at 5.13% interest, you would have a monthly payment of $415. Throw in a $1,500 down payment, however, and your monthly payment drops to $387.
What if you don't have any money saved for a down payment? Sometimes you unexpectedly need a new car because of problems with your old car. The good news: As long as you have equity capital, your old car can be part of your down payment.
Car equity means the value of your trade-in vehicle is more than what you owe. If you own your car free and clear and the car is worth $2,500, you have $2,500 of car equity. If you owe $1,500 on your car loan but the car is worth $4,000, you also have $2,500 of equity in the car ($4,000 - $1,500).
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Add $2,500 worth of trade-in to your $1,500 down payment and you have a $4,000 down payment (20% of the total cost of the new car). With a 20% down payment, your monthly payment on the same loan drops to $340, a significant difference.
If you don't have a down payment or trade-in, you can still get a new car as long as you have a good credit score. (If you're not sure what your credit score is, you can get a free score to find out.)
To help lower your loan costs, start looking for an auto loan before you visit the dealership. Contact at least three banks and credit unions to find out which loans you can get. Get pre-approved for a loan when you get a good offer. After filling out the initial application, the lender will give you an estimate of how much money they will lend you and what interest rate they will charge. Getting pre-approved for an auto loan doesn't force you to get a loan, but it can give you more negotiating power at the dealership.
Many people don't finance a new car through a dealership because it's easier. However, third-party financing from a bank or credit union almost always offers better terms than dealer financing. If you've considered third-party financing options and still can't afford the new car you want, consider these alternatives:
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While zero-down financing may sound attractive, it's usually not the best way to finance your new wheels. Buying a new car without a down payment can burden you with higher monthly payments. Even worse, you could end up owing more than the car is worth. Instead of using zero down financing, consider other options to get the car you want at a price you can actually afford.
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Benefits Of Making A Down Payment On Your Car
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