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How to Buy Car With No Down Payment

 Understanding Down Payment on Car Loan

zero down car loanWe often hear the questions, “How can I buy a car with zero down payment?”, ” Is it possible to get a car with no money down?”, or “How much down payment will I have to make for this car?”

There are a number of ways to acquire a new or used car without making a down payment, or making a minimal down payment. Let’s take a look.

New car without down payment

Most new-car purchases require a down payment but here are four cases where it is possible to escape that requirement:

1. You get a highly discounted purchase price such that the loan-to-value (LTV) ratio is 100% or less — that is, the loan you need is equal to, or less than, the value of the vehicle. Most loan companies set a new car’s value at sticker price. So, when you negotiate a lower price, you reduce the requirement for a down payment — assuming your credit score, income, and income-to-debt ratio are acceptable.

Continue reading How to Buy Car With No Down Payment

Used Cars Not to Buy

buy used carAll used cars are not the same, even those of the same year, make, model, and mileage. However, certain models have proven over time to be much less reliable than other similar models.

Consumer Reports magazine publishes its Annual Auto Issue each year in April. In it, they reveal the results of a survey of thousands of car owners who have provided detailed responses to questions about the reliability of their vehicles.

From that data, the magazine’s staff compiles reliability ratings and rankings for nearly every make/model used vehicle for the last 10 years.

The ratings are based on responses to specific questions about problems with the engine, cooling system, transmission, drive system, fuel system, electrical, climate control, suspension, brakes, exhaust, paint/trim, body hardware, power equipment, and electronics.

They not only publish a list of the best used cars, but also a list of those vehicles that represent the worst used cars — the ones that should be avoided.

This year there are 108 vehicles on Consumer Reports‘ Worst Used Car list.  Here are samples from that list:

  • Acura TLX ’15-16 (model years 2015 and 2016)
  • Audi A3 ’16
  • Audi A4 ’09-10
  • Audi Q7 ’15
  • BMW 1 Series ’11
  • BMW 3 Series ’08-11
  • BMW 4 Series ’14
  • BMW 5 Series ’08, ’12
  • BMW X3 ’07-08, ’11
  • BMW X5 ’11-12
  • Buick Enclave ’08-11
  • Buick LaCrosse ’07
  • Buick Lucerne ’08

Chevrolet has the most models on the list — 15. Ford, GMC, and Volkswagen also have a significant number on the list — 9, 7, and 9 respectively.

Conversely, popular brands such as Toyota, Honda, Kia, Hyundai, and Mazda have very few — 2 models or less — on the list. Lexus has none.

It’s significant to note those vehicles on the list that have a string of multiple years of unreliability. The Ford Focus is an example with the years 2012 through 2016 listed as not recommended — 5 straight years of unreliability. The Dodge Grand Caravan also has 5 years noted, as does the Chrysler Town & Country.

The Mini Cooper has 7 model years listed, and the GMC Acadia has 8 models, the most of any make/model.

Several have 4 model years on the unreliability list:

  • BMW 3 Series
  • Chevrolet Silverado 2500HD
  • Chevrolet Suburban
  • Chevrolet Traverse
  • Jeep Grand Cherokee
  • Volkswagen Jetta

In summary, not all used cars are the same. Some are great choices based on actual owner surveys, and some are not. Making the right choice when you buy can save you money and problems in the future.

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Is Leasing a Car a Bad Idea?

Does leasing a car make sense?

used car or lease new carMaybe.

If you compare monthly payments for leasing versus borrowing for a brand new car, you’ll find that lease payments are about half those of a loan for a term of 3 years.

But what if you are considering a used car, not a brand new one?

First, only brand new cars are leased, not used. However, if payments are only half that for a brand new car loan, it means that you could lease a brand new car for about the same payments as for a loan on a used car that costs half as much as brand new.

Stated another way, since an average car loses half its value in 3 years, you could lease a brand new car for about the same payments as for a loan on a 3 year old used car.

Therefore, if you are thinking of buying a relatively new used car, leasing could provide you a way to drive a much newer car for the same money.

Of course, if your budget doesn’t allow a relatively new car, then leasing may not be the answer for you.

Are there other things to consider if I choose to lease?

Yes.

First, leasing is not a way to own a car, even after the lease has been completed. However, most leases offer a purchase option at lease-end that allows you to buy the car for the part of the original value that you haven’t already paid during the lease.

Furthermore, leasing requires that you only drive a “normal” number of miles — about 10,000 miles a year — and that you keep the car in good condition. Any unusual wear or damage must be repaired prior to returning the vehicle at the end of the lease.

You also don’t have the same level of flexibility with a lease. Although ending a lease early is possible, it can be very expensive. Leasing is best for people with a stable lifestyle and who will not want out of their lease before its normal end.

If you want to learn more about leasing, go to LeaseGuide.com.

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Negative Equity Car Deal – How to Make it Work For You

What is Negative Equity ?

upside down car loan - negative equityWhen you get a car loan and agree to pay it off over, say, 5 years there can be times during that loan in which you owe more than the car is worth. It’s called being “upside down” or “under water.”

If you wanted to sell or trade your car during this time of negative equity, you would need extra money to pay off your loan because the value of your car doesn’t cover the full amount you owe.

This situation can happen for a number of reasons:

  • You paid too much for the car initially, which means your loan can be “upside down” from the very beginning
  • You agreed to a very long-term loan that doesn’t get paid off as fast as the car depreciates in value
  • You have a very high interest loan, possibly due to bad credit, which creates payments that pay down your balance very slowly
  • You made little or no down payment and the value of your car depreciated at a faster rate than the rate at which you pay off your loan
  • You purchased a car make/model that loses its value faster than similar cars of other brands
  • Your car becomes damaged or not well maintained, which decreases its value
  • You drive an unusually large number of miles each year, which creates a “high-mileage” vehicle with high loss of value

Who is most likely to have a negative equity car loan?

People who are most likely to find themselves in a negative equity situation are inexperienced young people who have limited income and less-than-great credit.

Inexperience temps these buyers to purchase more car than they can afford, with insufficient down payment and a high interest rate. They also opt for a much-too-long loan term as a way to create affordable monthly payments.

The result is almost certainly to be an upside down loan situation.

What can you do if you have negative equity and want to sell or trade?

Sell or trade? The two situations are different if negative equity is involved.

If you sell your car, the money must be used to pay off your loan. If that amount is not sufficient to fully cover the loan, you must come up with the difference in cash. Your loan company will not allow you to continue paying on the loan.

If you trade your car, you may have some other options.

If the amount of your negative equity is relatively small — less than 10% of the value of the new car — a dealer may be able to “roll” the amount into the new loan. It increases the monthly payment amount on the new car, and likely puts you right back into another upside down situation — not a good habit to get into.

The ideal way to resolve negative equity is to simply have the cash to pay it off.  When trading, this means adding the cash to your down payment for your new loan.

Leasing is another option that can work for some people with negative equity

Since leasing provides much lower monthly payments than buying with a typical loan, rolling negative equity from a loan into a new lease can soften the impact.

However, this strategy will only work if the amount of negative equity is not too great.  Furthermore, only brand new cars are leased, which means you might have affordability issues.

For more details on leasing, see LeaseGuide.com.

Are there other problems with negative equity?

Yes.

If your car is stolen or is totally destroyed in an accident, your insurance (or the insurance of the at-fault party) only pays current replacement value, not the amount you owe on your loan.

If you are upside down when this happens, your insurance settlement, minus your deductible, doesn’t fully pay off your loan — which means you must arrange for the difference on your own. This can often be a financially devastating situation if you have a great amount of negative equity.

When does negative equity not matter?

So it seems negative is only a problem if you will want to sell or trade before your loan is paid off — or if your car is stolen or totaled.

If you keep your car and complete your loan, it’s not a problem. In fact this is the easiest and least expensive way to get out of a negative equity situation.

How to avoid negative equity and its problems

  • Make sure you don’t over-pay for your car
  • Never take a loan that is more than the purchase value of your car
  • Make as large a down payment as possible on your car loan
  • Shop for the lowest interest rate loan at banks and credit unions
  • Avoid very long length loans of 72 months or more (60 months max on used cars)
  • Repair damages and keep your car in good condition

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Beware of Buying Hurricane Flooded Cars

Flood Damaged Cars from Hurricane Harvey and Irma Will Soon Begin Showing up on Used Car Lots All Over the Country

flood damaged carsEarly estimates indicate that as many as half a million cars have been flooded and damaged in the path of Hurricane Harvey and Hurricane Irma. That number might be a low estimate given the breath of the disaster.

These are not only personal and business vehicles but brand new and used vehicles on dealers’ lots.

Most will have suffered damages caused by water in the engine compartment, the interior, the trunk, and inside door panels. Electronic and electrical systems as well as computers will have been destroyed. Exteriors and paint will also be affected.

Most of these vehicles have been insured, including those on dealers’ lots and in showrooms. Owners will receive some compensation, although probably not enough to cover a replacement vehicle or cover loan or lease balances.

What happens next?

Historically, what we know will happen is that insurance companies will declare almost all these vehicles as total losses (“totaled”). Once that happens, they  will try to recover as much of their losses as possible by selling many of the vehicles to “rebuilders” and others, some of which may not be competent or reputable.

Rebuilders will attempt to repair these flooded and damaged vehicles and put them back on the road by selling or auctioning them to used car lots around the United States. Depending the state, they may or may not come with a salvage or rebuilt title. Many will have purposely had their titles “washed” to eliminate the salvage indication.

In some cases, dealers may not know they are receiving water damaged goods when they buy. And most won’t inspect or look for such damage before selling to unsuspecting customers.

What’s the problem?

Anyone looking for a used car in the months, even years, after a major weather event such as Hurricane Harvey should take extra caution to avoid buying a water damaged vehicle. They are often difficult to spot.

Since water destroys practically everything in a vehicle that it touches, repairs can be major and costly. However, rebuilders often take short cuts, using cheap parts, and ignoring hidden damage to keeps costs down and profits up — all of which won’t be obvious to inexperienced car buyers.

Buyers should look for common signs of water damage before buying. It might be unusual rust in the trunk, musty damp smelling carpets, discolored upholstery, non-working electrical or electronic equipment, mud and debris in the engine compartment, corroded wiring under the dash, hints of extensive repairs and replacement of parts, and possibly a poor repaint job.

In summary, used car buyers are exposed to the very real risk of unsuspectingly buying water damaged and poorly repaired vehicles for a long time after a major national weather event such as Hurricane Harvey and Hurricane Irma.

High Mileage Car – Good or Bad?

Is It Smart to Buy a Car with High Mileage?

high mileage used carWhen shopping for a used car, you might find a car you like that appears to be in great condition but has what seems to be high mileage.

Since about 15,000 miles a years is average for most cars, anything significantly more  is considered high mileage. So, for a car that is, say, 6 years old, it should have about 90,000 miles to be considered as “average.”

However, just because a car has an average number of miles — or less —  doesn’t mean it’s worth buying. It could easily have serious problems if it has been driven roughly and not properly maintained, or has been wrecked and poorly repaired.

Continue reading High Mileage Car – Good or Bad?

Can I trade my car for a cheaper car?

Can I lower my car payments by trading for a less expensive car?

trade for cheapere carYes — maybe.

But whether it’s a good thing to do will depend on your particular circumstances. Let’s take a look.

If you want to trade your car for a cheaper car, it probably means you are finding it difficult to afford payments on the car you now have. Or you simply want to trade down to have a little extra money each month by lowering your payments.

Let’s look at the two different possible situations, one of which will probably match your own situation.

Situation #1

You are “upside down” on your current loan. That is, you currently owe more on your loan than your car is worth as a trade-in vehicle. You can determine how upside down you are by first asking your bank or loan company to give you your loan payoff balance. Then compare that amount to the actual trade-in value of your car (see www.kbb.com and www.nadaguides.com). The difference in the two amounts will tell you how much you are behind in your loan (“negative equity”).

Continue reading Can I trade my car for a cheaper car?

Dealer Wants Car Back – Legal or Not?

Can a Dealer Take Back a Car After Papers Are Signed? Is it Legal?

dealer wants car backThe short answer to the above questions are Yes and Yes.

It’s a fairly common situation.

You buy a car from a dealer who arranges a loan, you sign the papers, possibly make a down payment and/or trade an old vehicle, and you drive away — thinking the deal is done.

Not quite.

You may have received the impression from the dealer that your loan was approved, which is presumably why you were allowed to drive away in your new car.

However, most dealers don’t provide or approve loans (except for buy-here-pay-here used car dealers). They use outside banks or finance companies. One of the papers you signed was a loan application, not a loan approval or grant.

Continue reading Dealer Wants Car Back – Legal or Not?

How many miles are too much for a used car?

Should I buy a car with high mileage? How many miles are too much?

high mileage carsWe frequently hear these questions from people looking for used cars for sale.

Generally, 15,000 miles a year is considered an “average” number of miles per year. So a car that is 5 years old would have about 75,000 miles to be considered “average.” Anything significantly more, and a car is considered to be “high mileage.” Anything significantly less, and it’s a “low mileage” car.

What does it mean if a car has high mileage?

Does it mean you should avoid cars with “high” mileage? Or that low mileage is always better?

Are cars with high mileage a bigger risk? Will they break down sooner?

Not necessarily, to all these questions.

In the last decade or so cars have become much more reliable than years ago when a car was looked at as junk when it reached 100,000 miles. Not so anymore.

Many modern cars with 100K-150K miles are in great condition and will easily go another 100K.

However, if a car has not been maintained properly and has been driven hard or previously wrecked, it can be junk with only 30K miles on the odometer.

Continue reading How many miles are too much for a used car?

Actual Car Loan Interest Rate

The annual interest percentage rate (APR) you pay on a car loan can be deceiving.  Because of the way in which loan payments are calculated, the actual interest rate, as a percentage of the loan amount, is higher for loans longer than 12 months. The exact rate depends on the APR and the length of the loan, but does not depend on the loan amount. See for yourself with this calculator.

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For example, say you have a car loan for 60 months at 12% APR, which might be the case if you have poor credit.  You can see from the calculator that the actual amount of interest you pay is about a third of your loan amount.

This means that for every three dollars you pay on your car loan, you pay another dollar for interest.  This is money you never get back.

To minimize the total interest you pay on a car loan, do the following:

  1. Borrow as little as possible
  2. Make as large a down payment as possible
  3. Choose the shortest loan term as possible
  4. Lower your APR interest rate by improving your credit and shopping for better rates online and at local banks and credit unions