Is Buying a Car with No Down Payment Right for You?

Buying a car with cash or a large down payment is a worthy but lofty goal. Most people need cars, but many can’t save up a substantial down payment, let alone pay cash for the whole thing. You might want to consider a zero-down-payment car loan in these cases. But while this option can be helpful in the short term, allowing you to buy a car when you need one, it can also have long-term financial downsides.

When you buy your new car, you need to make sure you’re set up with the right car insurance. A local independent insurance agent can help you get the coverage you need by shopping and comparing policies and quotes from multiple companies for you. But first, here's a guide to whether zero-down-payment car loans are the right choice for you. 

What Is a Zero-Down-Payment Car Loan?

Usually, when you buy something on credit, you’ll have to make a down payment and finance the rest. For cars, you can often use the trade-in of an existing vehicle as your down payment, which may be a few hundred or a few thousand dollars. But if you don’t have a cash down payment or a trade-in, you may find a car loan that allows you to finance the entire purchase, including the purchase price, registration fee, title fee, sales tax, and other fees. 

How to Get a No-Down-Payment Car Loan

If you’re interested in an auto loan with no down payment, you’ll need to qualify first. Here’s what most lenders often look at: 

• Your credit score
• Your current car’s trade-in value (if applicable)
• The purchase price of the car you want

There are several ways to qualify, such as the following tips. 

1. Have Good Credit

Your credit score is the most important factor when applying for any loan, and it plays an even more significant role in a no-down-payment car loan. Since your loan may actually be larger because you’re rolling all of the fees into the cost, you'll need good credit to be approved. Having a good credit score will not only help you secure the loan, but it might also help you get a better interest rate. 

2. Trade in Your Old Vehicle

Lenders typically prefer that you have a trade-in car where the value can be applied to the new car's purchase price. This is the best way to minimize the financial costs of a zero-down-payment auto loan, but only if you have equity in the car, meaning the car’s value is greater than any loan amount you have on it. 

It’s great to have both a good credit score and a trade-in. If you’ve only got one of these, don’t worry yet. You can probably still secure the loan if you fulfill some other prerequisites. 

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3. Get a Cosigner

Another option to secure a car loan with a zero-down-payment option is by getting a cosigner, particularly if you don’t have a great credit score. A cosigner is a third party who takes full responsibility for paying back the loan on your behalf if you default.

4. Pick an Affordable Car

In all cases, you should only try to buy a car that you can truly afford. If you can’t get approved for the loan amount you want, you might have to choose a less expensive car. 

If all of your efforts don’t work, ask the lender what amount you could get approved for. You also might need to wait a while until you can save up for a down payment. 

When a Zero-Down-Payment Car Loan Might Be the Right Choice

If you can handle the potential downsides, here’s how a zero-down-payment car loan can be beneficial in the right circumstances. 

• You get to drive a car off the lot without any immediate cash out of pocket, making the purchase less expensive in the short term. 
• You can use the money you might have used for a down payment for other things. 
• When you make consistent and on-time payments over the life of the loan, you can raise your credit score. You might even be able to get better terms on a future car loan. 

There are a few key instances in which a car loan with no down payment can be a good idea. Consider these possible scenarios and whether they apply to you when making your decision. 

When a Zero-Down-Payment Car Loan Might Not Be the Right Choice

While the no-down-payment car loan can be tempting, you also need to know what the downsides are. While these loans can seem like a fantastic option in the short term, over time, they can have an impact on your finances. Here are some potential downsides of no-down-payment auto loans to consider.

• Your overall loan amount will be higher since you’re financing the entire purchase price, including taxes and fees.  
• Usually, the more money you borrow, the higher the interest rate will be. 
• These loans inherently have higher interest rates. Lenders automatically assume you’re a riskier borrower, perhaps because you have a lower credit score or because of your loan-to-value ratio. If you don’t have a down payment, your loan-to-value ratio will be higher, causing your interest rate to increase. 
• Perhaps one of the biggest problems with these kinds of loans is that you can quickly go upside-down on the loan. This means you owe more on the car than the car is worth. Because cars lose value immediately, the chance of being upside-down on your loan is high. If you try to sell or trade it in, you’ll be unable to pay off your loan with the proceeds. 
• With the higher loan amount and higher interest rates, you can expect a higher monthly payment. While you may not have had to shell out money upfront, be prepared to pay more each month. 

It's critical to weigh the potential pros and cons of using a zero-down-payment auto loan to finance the purchase of your next vehicle. Knowing and sticking to your budget is a major factor in your decision. While you might really want a car today, don't set yourself up for financial difficulty in the future if an auto loan with no down payment isn't the right choice.

If you qualify and can handle higher interest rates and higher payments, a zero-down-payment auto loan remains an option that you can take advantage of. However, in many cases, saving up even a small down payment for your next vehicle can be beneficial in the long run.

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Get Help Insuring Your New Car with an Independent Insurance Agent

Your new vehicle needs the right coverage for you to avoid penalties like fines and more. The best way to find affordable car insurance is with the help of an independent insurance agent. These agents can shop around for the best rates for your budget by comparing quotes from multiple local car insurance companies. And you’ll get personal service and advice if you ever have to file a car insurance claim.