Buy Car Without Down Payment
We often hear the questions, "How can I buy a car with no down payment?", or "How much down payment will I have to make for this car?"
There are a number of possible ways to acquire a new or used car without making a 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 value of the car is equal to, or less than, the price you pay, in the eyes of the loan company. 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. Your credit score is very high (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 cover any down payment that might be required.
In the past, loan companies and banks were often willing to provide loan-to-value ratios higher than 100% to make it easier to purchase a vehicle, but those days are rapidly disappearing.
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 loans higher than blackbook 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 (you can't have too many bills relative to your monthly gross income).
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 or credit union and ask to be pre-qualifed for a loan for the vehicle your want. You are not actually getting a loan at that time, but 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 amount of loan you need, you have some choices to make:
1. Buy a less expensive vehicle
2. Make a cash down payment that makes up the difference between loan amount and car purchase price
3. Use a trade-in vehicle as your down payment
Summary
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 income, and your debts.