8 Steps to Buy Cars with Low or No Down Payment

Here's what you need to know
Couple negotiating paperwork with a car salesman.

Aside from your rent or mortgage, your car payment probably eats up more of your budget than any other expense. For those who paid a low or no down payment and those with moderate to low credit scores, this might feel like a fact of life. 

Owning a car doesn't have to break your bank, however, and there are ways to save even if you haven't always managed your finances well. By following these eight simple steps, you can avoid paying more than you should on a car. Just make sure you're covered with an affordable car insurance policy.

1. Know Your Credit History

Many people make the mistake of leaving the credit check to the dealer. You should come prepared with this knowledge before you even start looking at cars. Some less-than-scrupulous dealers may even try to tell you that your score is lower than it really is. That's why obtaining your credit score beforehand is so important. You can receive a free credit report every year and download it from the Internet.

Once you have your credit report, it's important to examine it for accuracy. If the report shows some accounts that you thought you closed years ago, be sure to clear up any mistakes.

Scores of 680 and above will earn you low interest rates on an auto loan. Scores between 550 and 680 are common, but you will pay higher interest rates. Scores below 550 will make it difficult to secure a loan, if not impossible. Do your best to raise your score.

2. Show the Lender Stability

Banks and financing companies don't mind lending money. It is, after all, how they make theirs. But they prefer to lend funds to those who prove themselves to be stable over time. If you don't already have a phone, put a phone number in your name so they can contact you. 

Also, it's important to have lived in the same home or apartment for a year or more to show them you are stable. The longer you have worked for the same company, the more appealing it will be for them to lend you cash. It’s also important to have car insurance lined up before you finance. Some lenders will add collateral protection insurance to your loan payments if you don’t present proof of car insurance.

3. Repair Your Credit

Knowing your credit score is one thing, but empowering yourself to improve it is another. If you have small credit card debts or a small car loan that you are still making payments on, try to pay those off as quickly as you can. Be sure to make any student loan payments on time each month – this can also improve your score. These tips may also help:

  • Do not open any new accounts before attempting to secure an auto loan.
  • Do not close any accounts, even if they are unused.
  • Do not allow any third party to run credit checks on you until you are certain you will be financing your car with them. Lenders will rank you less favorably when they see too many checks in your recent history.

4. Examine Auto Loan Rates

Do not expect to get the 0 percent financing you see advertised at a new car dealer if you have a low credit score. Knowing the most common loan rates will help you avoid being stuck with a ridiculous interest rate. Be prepared to pay a higher interest rate if you are applying for a car loan and you have a low credit score. 

If you do not have a down payment saved, you can also expect higher interest rates. However, that doesn't mean you should plow forward and buy a brand new car at 18 percent financing.

You may be able to secure a much better loan offer from your bank or credit union because you're their customer. Find out what kind of interest they charge so you can use it as a negotiating tool with the dealer. The dealer wants your financing and may be willing to come down on the interest rate if they know you have other options.

Having a down payment allows you to secure a lower interest rate and avoid paying higher monthly payments. If you have only a low down payment or no down payment saved at all, expect to pay higher interest rates and higher monthly payments.

5. Determine Your Car Budget

Once you're equipped with your credit history and you know what your options may be, you can determine what you can afford to pay for a car. You may not be able to afford a brand new $30,000 car with no down payment and a poor credit score. That's OK. New cars depreciate so quickly they often aren't worth the selling price, even if you had thousands saved and a perfect credit score.

It may be worth your time to investigate the price of slightly used cars. A car that is 1 or 2 years old is much less expensive. And you may be able to get the car with a low down payment or even no down payment at all. The lower the total loan, the lower the interest rate will probably be.


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6. Examine Your Car Needs

You should ask yourself several questions to find out exactly what you need in your next car. Do you really need an all-wheel drive car capable of traveling off road? A little self-examination will help you determine what kind of car you should look for:

  • How many passengers do you typically carry?
  • What kind of cargo space do you need?
  • Do you want an automatic or manual transmission?
  • Will you be towing anything?
  • What kind of safety features will you want?

Remember, the type and style of car you buy also determine how much you will be paying for insurance. It is more expensive to insure two-door sports cars than it is four-door sedans. If you're crunching numbers to find out what you can afford, the type of car you choose matters. 

In the end, an independent agent can be a big help. They can shop around to several insurance companies to get you a variety of quotes before you buy. Independent agents can get you the right coverage at the right price.

7. Shop Around for Your Car

Some people with few savings and low credit scores make the mistake of thinking they'll receive the same treatment no matter where they go to buy their car. Not all dealers are alike, and not all charge exorbitantly high interest rates. 

It's important to look at several dealers to find the best price and the most attractive financing options. Veteran car sales representative Terry Berg said the independent dealer he works for is happy to match or even beat their competitors' offers.

"My toughest customers always come in with a binder full of our competitor's prices," Berg said. "We always try to beat them. We want your business."

8. Negotiate a Fair Price

Another mistake many people with low credit scores make in the car buying process is thinking they can't negotiate because they are a higher risk to the lender. Many dealers will try to keep you focused on the monthly payment you'll be making during the negotiation stage. 

While it's important to stay within your budget, you want to zone in on the purchase price at this time. The more they want to sell you the car for, the longer you will make those payments. It doesn't make sense to settle for a payment that you can barely afford if you will be paying two years longer than you should.

If you are going to look at used cars, be sure to check the Kelley Blue Book value of the candidate vehicles given their age and miles driven. If a car's asking price is much higher that its Blue Book value, you have a trusted source of information with which you can negotiate them down to a fair offer.

And during the signing process, be sure to examine any fees the dealer wants to charge you. Some of these are negotiable while others are not, but it never hurts to try. Remember, the financial manager working with you to sign the purchase agreement is also a salesperson. 

Don't let the financial manager try to "upgrade" your purchase with extended warranties, add-ons or anything else. Most of the time, these additional costs are not worth it. Avoid falling victim to worthless warranties and add-ons that do not improve the car's performance or value.

Having low credit does not mean the dealer should take advantage of you during the car buying process. You can buy a car the smart way and restore your credit in the process.

Above all, make sure you're fully covered with an affordable car insurance policy.

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