No Money Down Auto Loans: How Do You Get Them and How Do They Work?

No money down auto loans help borrowers to finance vehicles without any out of pocket outlay. They are usually favored by consumers with good credit scores who don’t want to overcommit their cash. Some providers specialize in providing them as financing solutions to people who don’t meet conventional loan requirements.

There’s little doubt that no money down auto loans offer an immediate cash flow advantage to borrowers. However, that convenience comes with drawbacks prospective borrowers should carefully consider. This guide explains the essential facts you need to know to make an informed and responsible financial decision.

The Lowdown on Down Payments

Down payments usually apply to major purchases. Examples include things like expensive home furnishings, new or used vehicles, and real estate. Most people don’t have the means to pay for these purchases in cash and instead choose to finance them with a loan.

When financing purchases like cars and homes, borrowers usually offer a small percentage of the purchase price up front. This initial payment is known as a down payment. According to Kelley Blue Book, car buyers usually offer at least 10% of the vehicle’s sale price as a down payment.

Why Do Lenders Ask for Down Payments?

Every loan carries risk, and lenders need to mitigate these risks. Otherwise, they risk being run out of business by issuing bad loans. If even a slight disproportion of borrowers default, the lender’s entire financial situation can destabilize.

Down payments invest borrowers more deeply in the loan, since they prompt consumers to pony up their own money. Thus, they mitigate risk for lenders. Down payments also reduce lender losses in the event of a borrower default.

What Is a “No Money Down” Auto Loan?

A no money down auto loan is a car loan that does not require the borrower to offer a down payment. They liberate the borrower from the need to plunk down thousands of dollars in cash up front.

However, that convenience comes at a cost. Borrowers who finance 100% of the vehicle’s purchase price pay more interest over the life of the loan.

Who Qualifies for No Money Down Auto Loans?

There are two main types of no money down auto loans. The first type is designed for borrowers with high credit scores. The second type targets borrowers with limited savings and credit score challenges.

No money down auto loans for borrowers with good credit come with reasonable terms. They’re a kind of reward for those who qualify. The second type carries many more risks. Their interest rates are usually very high, and borrowers who miss payments don’t get much leeway.

In either case, lenders look at three main criteria when evaluating applicants:

Monthly Income and Spending Habits

Lenders want to make sure borrowers can comfortably afford to make regular loan payments. Thus, they will request information about your income.

However, income doesn’t tell the full story. As such, they will also look at metrics that quantify your relationship with money. These include your debt to income ratio and your debt to credit ratio.

Credit History

Your current debt levels only tell part of the story. Lenders will also dig into your credit history for clues about how much risk you may pose.

One thing they’ll look closely at is your credit score. They’ll also examine other loans you’ve taken out to see how you handled your repayment obligations.

Your Choice of Vehicle

Some lenders also consider the characteristics of the vehicle you’re seeking to buy. In this sense, they’ll try to answer two key questions.

First, they’ll consider whether the vehicle fits your financial profile. For instance, they’ll likely balk if you’re trying to buy a pricey sports car on a meager salary. Second, the lender will also look at whether the vehicle’s purchase price is a fair reflection of its market value. Issuing a loan for an asset with a market value below its sale price carries greater risk.

Who Offers No Money Down Auto Loans?

Online lenders and some traditional banks offer no money down auto loans. However, they are more commonly available through online finance companies.

Auto dealerships also provide no money down loans through their financing wings. These tend to carry the least appealing terms and the highest interest rates. If possible, seek financing from a bank or online lender before considering a dealership’s offer.

Advantages of No Money Down Auto Loans

No money down auto loans allow consumers to purchase vehicles without tapping into their savings. This provides financial flexibility, albeit for a price. These loans usually carry higher rates than you would pay if you offered a down payment.

There’s also a hidden advantage of choosing a no money down loan. You can repurpose the money you would otherwise have committed to the down payment. If you earn returns on it elsewhere, you can nullify your higher interest rates or even come out ahead.

Drawbacks and Pitfalls

When carefully sourced and managed responsibly, no money down auto loans can deliver healthy financial flexibility. However, they can also pose significant risks. In some cases, these risks can outweigh the accompanying advantages. This is especially true of loans targeting borrowers with low credit scores and little cash savings.

With that in mind, also consider these potential disadvantages:

  • They usually carry higher interest rates.
  • You will not have any initial equity in the vehicle.
  • Your loan’s lifetime costs could add thousands of dollars to the vehicle’s purchase price.

How to Get the Best Deal

Lenders don’t usually offer negotiable rates and loan terms. Thus, the way to extract maximum value from the loan is to pay as little as possible for the car.

There are a few ways to do this. However, you should brush up on your negotiating skills. Some auto salespeople try to extract as much money as possible out of their customers. These tips will help you avoid falling prey to their tactics:

Watch Your Purchase Price

The easiest way to keep your purchase price down is to target a cheaper car. Avoid the temptation to overspend on a vehicle you don’t actually need. Instead, opt for a car you can live with but is still practical and economical.

Next, be sure to concentrate on what is known in automotive circles as the “out the door price.” Salespeople often try to center negotiations on biweekly or monthly payments. This distracts your attention from the vehicle’s actual sale price. It’s a deceptive tactic that never works to your advantage.

Skip the Options

Another common sales trick is to offer add ons like extended warranties and fancy vehicle options. The intent: to increase the amount of money that comes out of the buyer’s pocket.

Add-ons like extended warranties and gap insurance sometimes add value. However, dealerships almost always overprice them. If you want these protections, consider purchasing them through a third-party provider.

Trade In Your Current Vehicle

Trading in your current car could lower your purchase price by thousands of dollars. However, there’s a very important technique you’ll need to use to get maximum value for it.

Many salespeople will factor in the trade-in when negotiating the new car’s price. Don’t fall for this, as it’s another example of how salespeople stack the deck against you. Instead, negotiate its value separately. Only discuss the new car’s price once you’ve agreed on the value of your trade-in vehicle.

Consider Making a Modest Down Payment

Yes, offering a down payment contradicts the entire premise of getting a no money down auto loan. However, if you have lackluster credit and little savings, you’ll do yourself a favor by opting for a conventional loan.

Saving up for even the smallest possible down payment can shield you from a disadvantageous situation down the road. High interest auto loans can easily lead to a situation where the sum you owe exceeds the car’s resale value. The numbers never work out to your advantage in such circumstances.

Wrapping It Up

No money down auto loans offer convenience and financial flexibility. However, they also carry several potentially dangerous pitfalls. As such, they are usually recommended only to buyers on sound financial footing.

If you’ve got credit challenges or little savings, you may find yourself with few other financing options. In this case, tread carefully. Do your own research and calculations, and make 100% sure you can afford your payments before signing anything.

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Devon Taylor

Devon Taylor is an experienced writer and a father of three young children. He's been in online publishing since 2013 and has a degree from the University of Guelph. In his free time, he loves fanatically following the Blue Jays and Toronto FC, distance running, camping with his family, and playing video games.

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