Understanding Down Payment on Car Loan
We 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.
2. If there are rebates offered by the manufacturer, those rebates can be applied as a down payment without the need for additional out-of-pocket cash. A rebate can serve the same as if it came from your own pocket.
3. You have a very good credit score (700 or higher) and the loan company is willing to provide a loan without cash down required. Not all loan companies have this kind of policy.
4. You have a trade-in vehicle with no outstanding liens (loans). The value of that vehicle can be used as a down payment, without additional down payment cash.
Some loan companies and banks may be willing to provide loan-to-value ratios higher than 100% to make it easier to purchase a vehicle, but you’ll have to have an excellent credit score to qualify.
Used car without down payment
Banks and loan companies use a used vehicle “blackbook” to determine values of used cars. Values are determined, in part, by year-model, mileage, condition, and location. The “blackbook” is similar but not the same as common value guides such as those from Kelley Blue Book and NADA Guides. Values may differ between these guides. Most banks and other lenders will not provide used-car loans higher than “book” value.
This discussion applies regardless of where you buy your used car — from a dealer, or from an individual seller.
The way to buy a used car without a down payment is to pay no more than “book” value. If you pay more than book, you must make up the difference in out-of-pocket cash – a down payment. Of course, this presumes that you can qualify for the amount of loan you need, based on your credit score, income, and income-to-debt ratio. If you can’t qualify for a loan for the full price of your car, you again must make up the difference with a cash down payment.
How do you know the “book” value of a car and whether or not you can qualify for the amount of loan you need?
Easy. You simply ask.
Go to your favorite bank, credit union, or online loan source and ask to be pre-qualified for a loan for the vehicle your want. You are not actually getting a loan at that time, and you are not obligating yourself. You are simply requesting a pre-approval for a loan amount for a specific vehicle.
If you find that you qualify for the full amount of the purchase price, you are good to go. If you buy from a dealer who arranges loans for his customers, you have a choice of going with the better deal — the dealer’s or your bank’s.
If you can’t qualify for the full loan you need
If you can’t get the full loan you need, it might be that your poor credit that is creating the problem. You should always know your current credit status before you apply for a loan. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
Also shop around for your loan. One lender may turn you down for the full loan you need but another might approve. Try reputable online lenders such as Auto Credit Express where you can often get the best rates, especially if you have poor credit. Many such loans do not require a down payment.
If you can only qualify for a smaller loan and don’t want a down payment, you have some choices:
1. Buy a less expensive vehicle
2. Get a co-signer who has better credit than you
3. Use a trade-in vehicle as your down payment
4. Negotiate a lower vehicle price to eliminate the need for a down payment by decreasing the loan-to-value ratio
Buying a car without a down payment is not difficult but it depends on your choice of vehicle, your purchase price relative to the vehicle’s value, your credit score, your choice of lender, your income, and your debts.