- 1 I Can’t Afford A Down Payment
- 2 Zero Down Car Loan Advantages
- 3 Zero Down Car Loan Disadvantages
- 4 Zero Down Car Financing Lenders
- 5 The Bottom Line
According to Bankrate, the average cost of a new car in the United States is $32,086. This means that for a buyer to put a down payment of 20 percent on a new car, they would need to have cash-on-hand in the amount of $6,417, an amount that the average consumer may not have on hand. With this in mind, many people may request a minimum down payment on the car and finance the balance. There are some tips, however, for avoiding a high monthly payment, when you give the best down payment you can even with a smaller down payment.
I Can’t Afford A Down Payment
In recent years, new vehicle costs rose by an average of just over one percent for the fifth consecutive year after declining between 1998 and 2008 1. However, many Americans are finding that their paychecks are not increasing to match the rising price of new cars. As of October 2014, salaries had risen just over two percent over the past year, only slightly ahead of inflation. This leaves very little room in the average budget to put 20 percent down on a new vehicle. You might decide to pay the bare minimum down payment.
How Does a No Money Down Auto Loan Work?
They will offer zero down auto loans, then ask to show a down payment on the loan. Without actually committing false advertising, the car dealer may ask the customer to make a small down payment to buy a vehicle. This is because the financing is done through a third-party bank or lender, and they require a down payment. However, car dealers have figured out ways 2 that customers don’t have to come up with the cash to make a down payment, which is why they can boldly say, zero down car loans.
Zero Down Car Loan Advantages
The first advantage a person thinks of when looking at a Zero Down Car Loan is that they won’t have to put up any money to get a new car. This has some truth to it if you qualify but the fact is that most who qualify could afford a down payment and those who can’t, probably wont qualify for the car they want. Two main ways the dealer accomplishes a no down payment loans is through “trade equity” and “vehicle rebates” (new cars). Trade equity can only be used if the customer has a car of some value to trade in. The price of the car can be put towards a down payment. If the car is not worth the entire down payment, the dealer will show the full amount needed and roll the remainder into the car loan. So in the end you will pay a lot of interest on the down payment that the dealer told you, you wouldn’t have to pay to begin with.
Even though the person didn’t have to come up with the cash, they did have to use the value of their trade-in. When the dealer advertises that they offer zero down car financing, it may be legal, and is a great pull to bring in customers, but, in this case, it isn’t actually true.
Reduce The Loan Amount
The dealer will apply dealer or customer rebates to the loan as a down payment to reduce the amount of the loan. A fact of nature is that a new car loses from 20% to 25% of its value practically the minute it is driven off the lot. 3 If the no money down car loan was for the full price of the car, the customer would be paying for a loan that is 20% to 25% more than the value of the car. With a down payment, either from a trade-in or cash-back, the amount of the loan is more in line with the actual value of the car.
Zero Down Car Loan Disadvantages
The above doesn’t seem so bad. In fact, it seems like a good deal. However, there are 0 down car loans that can cost the buyer much more in the long run. Many people don’t really understand the intricacies of interest rates and their impact on a zero down car financing loan. The car dealer scams presented to you when working on financing with a car dealership don’t seem to be car scams at all. Unfortunately, car dealers may take advantage of this ignorance. He will convince the buyer that driving a car off the lot in exchange for nothing is a really good deal.
Value Can Fall Fast
Without making a down payment, the buyer may take three years just to cut the loan in half. If you make a down payment up front, the amount owed in three years can be greatly reduced and, often, the loan can be completely repaid in a little more than three years. The higher the interest rate, the longer it will take to repay the loan. This is because the monthly payments are going towards the interest on the loan and not the principal. If the principal is not paid down, this can go on for years.
This is also called being Under Water or negative equity. Many times, with 0 down car loans, the amount the buyer owes on their car loan after paying for two or three years is more than the car is actually worth. If a down payment was given at the beginning, the buyer can often sell the vehicle for a price that will pay off the loan. In the case of zero down auto loans, this is often not the case. The car may be falling apart, but the owner can’t afford to give it up, and all the while they are still making payments on their ‘fantastic’ zero down payment car loan. If making a down payment of any kind is out of the question, a good lease agreement is far better than this kind of debt spiral.
Zero Down Car Financing Lenders
Companies that finance auto loans consider no money down car loans riskier than loans where the buyer paid a down payment. This is because the buyer has invested money into the car and is more likely to keep up the monthly payments and, finally, repay the loan. Statistics show that buyers who choose zero down auto loans are more likely to default on the loan in the end. Default is bad enough, but the car will most likely be worth less than the amount of loan that is left.
In fact, it’s a small percent of people with bad credit scores who most need 0 down car loans, and they are the very ones who could have trouble repaying the loan. Lenders may give the loan, but the interest rate could be very high. The cost of the car will also be taken into consideration. If the price is higher than the value of the car, lenders will most likely not give the loan because if the buyer defaults, the lender is stuck with a valueless car.
Tips For Choosing The Best Loan
Before deciding to purchase a car with an auto loan, it is critical to understand your financial situation. The first step is to check your credit report to be sure you qualify for a car loan. If your credit is less than perfect, you can still obtain financing, although your interest rate may be higher than someone with perfect credit. It may be harder to get financing with poor credit, if you do not have a down payment. Therefore, correcting any problems on your credit report before going shopping for a new vehicle is strongly advised. You will also need to provide proof of income and address to the lender when you apply for the loan, so be sure to have that information available and take the right steps to reconstruct your credit score.
Sell Your Old Car
If you have an old car that you are considering trading in to purchase a new one, it is often better financially if you sell the car yourself, especially if the car is in excellent condition with low mileage. However, if your car has mechanical problems or is in poor condition, it may be difficult to sell. In that case, it is better to trade in your current vehicle at the dealer to lower your down payment when financing. Keep in mind that no matter what condition the vehicle is in, the dealer will offer less than the trade-in value. You will need to factor that in when determining how much you will have for a down payment if part of that down payment is the trade-in.
Lower Monthly Costs
You should try to give a decent down payment to lower your monthly payments. However, what many consumers do not know is that a lender can do a number of things to get the monthly payment where you need it to be to fit your budget so you don’t have to write a down payment check. If your credit rating is high enough, they can lower the interest rate or they can offer a longer term of the loan, allowing you to pay for six years rather than five, for example. Therefore, other options are available if you do not have a large down payment or would prefer not putting a large sum down on a vehicle initially. This can also be offered if you are simply refinancing your car for lower payments.
During certain times of the year, many auto manufacturers and dealers offer cash rebates on specific vehicle models to boost sales. A cash rebate is a good way to put a down payment on a car without having to take money out of your own pocket. Some dealers even offer rebates on new-car leases as well, but they don’t serve as cash on signing or a down payment. In those cases, the cash often goes to the dealer who then applies the rebate as a lower down payment or a lower monthly payment on the lease. Some dealers won’t tell you about the rebates but use them in the negotiating price that you may find out later at the signing so ask about them during price negotiating. Also check to see if the car you are considering is eligible for tax credits for alternate fuel or electric vehicles. The tax incentives could easily pay back the money you use on your down payment so it’s like not having to lose the cash down payment you came up with.
Financial Company Benefits
Financial companies prefer down payments as it provides them with cash at the beginning of the loan so that if the buyer defaults, they still have some cash collected. A down payment also offsets the instant depreciation on a new car so that if there is an accident or if the buyer defaults, the finance company does not suffer as great a loss. This is why many lenders offer lower interest rates to buyers who provide higher down payments as it indicates a buyer who is more likely to make payments regularly and on time than one who does not.
Beware of Dealer Financing
Whether you decide to put a down payment on a vehicle or trade one in, it is important to review all documents placed in front of you by the dealer. Many times, buyers only focus on the purchase price of the car. If you are financing the vehicle through a dealer-based finance company, check all documents to be sure you are getting the right interest rate and that all deductions entered correctly. If you are using a trade-in as a down payment, check to be sure that the amount quoted you on your trade is the amount entered on all financial documents. Some dealers will enter a lower amount on documents than they tell you. Ask about taxes and licenses fees as well, they could raise the cost of the vehicle. Consider negotiating the price of the car and leaving the dealership before discussing the financing to broker an even better deal. Again, if possible, arrange financing before going to the dealer to eliminate deceptive practices or in-house auto loans, when you are purchasing the vehicle.
Buying a new car is exciting, but it is important to understand the many aspects of financing the vehicle as well. Although a down payment can reduce your monthly payments and may be required if your credit is poor, not every lender or dealer requires down payments in order for those of high risk to qualify to finance a vehicle. Consider obtaining financing prior to arrival at the dealership to make the car buying experience even less stressful.
The Dealer’s Marketing Ploy
Car dealers need to sell cars, and they will use every means to do so. 4 This means they attract customers with their advertising of cars with zero down payments. Then they get them attached to a particular car or model through test drives and sales pitches. By the time the buyer is in the office talking about payment, they realize that zero down car loans won’t work for them. The dealer is hoping that the buyer is so attached to the car that they won’t walk away. The main buying topic may be the size of the monthly payment and not the interest rate.
Also, the credit score of the buyer plays a big part. Low interest rates are only given to people who have a high credit score. This is where the buyer gets stuck. They are attracted to the car, the zero down car financing and the low monthly payments and have no idea of the serious trouble they are walking into with the interest rate. Statistics show that one out of ten buyers just go with the offer given by the dealer and their zero down auto loans being sold.
So what have we learned? Basically, putting as big a down payment on an auto loan as possible is the best option for reducing the cost of the car over the dealer who does not require one. In fact, any down payment is better than zero. If you have never been on a budget before, these concepts may seem very different to you. In any case, buyers should beware and go to the dealership with at least a little understanding of interest rates and the final cost of the loan. Sometimes it is the only option for some people, but making sure you are informed about the difference between 0 down car loans and a small down payment could help you make the right decision. Valley Auto Loans can help you find the best auto loan for you. If you have no choice and a zero down car loan puts you in a high payment situation, Valley Auto Loans can be the best company to refinance your car loan after your credit improves in time. You can fill out an auto refinance application online with no cost or obligation. You can also check out the Blog and Resources pages to help you make an informed decision today.
Sources and Citations:
- http://247wallst.com/autos/2014/04/15/are-rising-car-prices-a-good-thing-for-the-economy/ ↩
- http://www.businessinsider.com/21-car-buying-scams-and-how-to-avoid-them-2012-10 ↩
- http://www.carsdirect.com/used-car-prices/why-does-a-new-car-lose-value-after-its-driven-off-the-lot ↩
- http://www.alternet.org/economy/8-ways-used-car-dealers-can-swindle-you ↩