If you’re looking to buy a new car, then you know it takes a good chunk of change to make it happen. But what if you don’t have the cash, and you still need the car? This article will talk you through an option you might not be aware of: no money down car loans. While this loan has pros and cons, it might be the right option for you depending on your situation. Read below to find out what it is, how financing works, the best lenders to look at, top tips for approval, and what to consider if nothing seems to be working.
The Top Auto Loan Providers for Bad Credit
What’s a No Money Down Car Loan?
A no money down car loan is exactly what it sounds like. Depending on your situation, the auto dealer you’re working with may be willing to forego the cash up front. They often do this for loyal customers.
The catch with no money down options is that it’s often made up for with a high APR (annual percentage rate). This means a couple of things. One, you should really consider if this is the right option for you because overall, it could end up costing you more. Two, if you do decide a no money down car loan is the right option then you absolutely have to “shop ‘til you drop” to find the right one (it really can make all the difference!).
“Is this the right option for me?” That’s the first question you should ask yourself. A no money down car loan is appealing for individuals who don’t have the money to make a down payment but make sure you consider why you don’t have the money. Ensuring that you’re in a financially stable place before taking on a loan is crucial to paying it back and not defaulting on it. If possible, consider a small down payment. It doesn’t have to be thousands of dollars to make a difference! Even a couple hundred can help you get an auto loan with better rates. More on this later!
That said, if the above still isn’t an option, you might be a true candidate for a no money down car loan. You’ll want to make sure you shop around for both a zero down lender and a good car. Applying to one lender means that you’ll only have one option. Given that there are some bad deals out there on no money down car loans, you’ll want to maximize your options to ensure you’re getting the best one available. To save your credit score as much as possible, submit all your applications with a 14-day period. Doing this for the same type of loan means that applying to different lenders doesn’t hurt your credit any more than applying to one lender would.
How No Money Down Car Financing Works?
If you’re considering a no money down option for your next car, it’s a great idea to understand how the financing works. Normally, auto lenders use upfront payments from auto loans to finance other loans. Thus, when someone doesn’t give them a down payment, it’s a risk for them.
To accommodate for this adjustment, they offer higher interest rates or loan terms that will typically have the borrower paying more over a longer period of time than they would over the short term.
Keep these two things in mind when figuring out if this is the right option for you:
- No money down is more expensive: There’s no doubt about it. The no money down auto loan option is more expensive because it creates a higher risk for the lender. They would rather have a borrower give them money up front than get the money slowly over time. Thus, they’re attempting to deter you from doing so from offering less than ideal terms. In the long run, the no money down option is going to be more expensive. If you make a down payment, it will end up being less money overall. Financially smart individuals go the no money down route if, and only if, they have absolutely no other options or cash to fund an upfront exchange.
- Individuals with bad credit scores sometimes go this route: A poor credit score can make it seem downright impossible to get an auto loan, and if you have poor credit, you may also be in a financial situation that doesn’t lend itself to a bunch of extra cash. If you’re one of these individuals, you may be considering the zero-down option. Just keep in mind that you’ll be at the mercy of your lender, so you have to look at the loan terms closely since it’s the pricier option. Look at the total loan amount instead of the monthly payments and do your research to ensure you’re getting the best interest rate offered. Though, the absolute best thing you can do, if it’s an option for you, is to wait to buy and raise your credit score so you’re in a financially smart place before you subject yourself to a long-term loan.
What Do Zero-Down Lenders Look At
When applying for a no money down auto financing option, lenders typically look at credit scores, recent credit history, down payment amount, and monthly income. A bad credit score can hurt you a lot in a no money down situation because it gives the lender leverage to raise interest rates. Having a credit score of 680 is a good benchmark of where your score needs to be before you can negotiate a better rate. While you may be able to get your down payment waived at a score between 550 and 680, you’re still looking at high-interest rates throughout the process. Any credit score below 550 likely won’t work in your favor. Along those same lines, your recent credit history is important too. If you’ve recently taken on a lot of debt, your lender may see this as a trend in your credit history. You look like much more of a risk if you’ve opened up new lines of credit recently and are also looking for a no money down car loan than if you have a solid history. Your history can have a large impact on whether or not you’re approved, so keep that in mind if you’re looking to get an auto loan and try to improve it month to month.
Additionally, zero down lenders also look at the down payment amount in the situation. Yes, we’re still talking about a no down payment loan but every little bit counts. If your credit score is particularly bad, mitigating that with a couple hundred dollars down payment could be helpful in persuading a lender to give you the loan. Offering no down payment at all and having poor credit doesn’t seem enticing to a lender at all.
Finally, your lender will likely look at your monthly income as you’ll need a way to pay back the debt you’re taking on. They may ask for either pay stubs or bank account information. An important factor in this component of the application process is having a steady monthly income in a secure job. Start searching for a job if you do not have one before you apply for the loan. If you need additional income, look for a second job at night or on the weekend that works with the schedule of your main place of employment. If you’re self-employed, tax returns from the past couple of years can help you demonstrate income in the same way that pay stubs would have otherwise. Your ability to repay is what a lender is looking for, so you maximize your chances of approval by your ability to demonstrate this through credit history, down payments or a steady income and job security.
Tips for Approval with No Money Down
Top tips for approval really rely on knowing what lenders will be looking for and looking at. How will you know this? Through your own research and preparation! As we know, lenders are looking for your ability to repay. Here’s how you can demonstrate this and get approved in no time.
- Personal bank account. This might sound like a no-brainer BUT maintaining a personal bank account means that you must demonstrate income with regular deposits and NO overdraft withdrawals. You don’t have to be making six-figures but having an account where your money lives and grows is an important step in demonstrating that you’re financially responsible.
- Job. Make sure you have a job! This will be best received if it’s a job you’ve held for an extended period of time and you can demonstrate job security. The longer you’ve been at a job, the better it looks to a lender. Having a constant change in employment demonstrates an inability to commit and is a red flag to lenders which you’ll want to avoid when applying for no money down loans.
- Residence. This is like having one source of constant employment. If you’re an individual who constantly moves without a solid reason, your lender will worry it could prompt you to default on your loan. Maintain a consistent residence for at least one year and remember that all your addresses show on your credit report, so there is a trail if you can’t hold down an apartment.
- Check that credit score. Knowing your credit score can be really helpful throughout the process because it’s one of the things you know a lender is guaranteed to check. If you’re not informed about your credit score, you’ll never know if something easy to fix is what’s holding you back. Improving your personal credit by making payments on time, eliminating existing credit card balances, raising your credit limits, removing late payments, and using only a portion of your existing credit can make a huge difference in how likely you are to get approved. Even 30 days of improving your credit score can make a big difference.
- Be prepared. Once you’ve done all of the above, make sure you’re prepared, organized, and ready to go! You’ve completed all the difficult steps so being organized can help get you to the next step and get the loan approved. Having evidence of your bank account, pay stubs, proof of residence, and credit score ready and on hand can help the process along significantly.
Things to Consider When Nothing Works
Although you came here looking for ‘no money down,” what if it’s not working? If you have poor credit, it can be really tough to get approved without having high-interest rates or ending up in a situation where you owe more than the car itself is worth. It might be time to consider something different, and that’s shouldn’t be the end of the world. There are still ways to consider zero down payments with a few modifications to make it work for you!
- Opt for a small down payment: You don’t have to put a couple grand on a car to make a down payment. Offering money up front gives you negotiating power with a buyer if you 1) don’t have good credit or 2) don’t want the high-interest rates they’re offering you. A small down payment may be a small price to pay if you have money to offer up front—we’re talking $100, $200, $300. If this means saving up for a paycheck or two, it could be the way to go.
- Take the time to improve your credit: This is one of the biggest pieces of advice in any financial situation for people with poor credit. If you’re someone whose credit could use a little sprucing, it might take just that to get you where you need to be. Accepting a loan with poor terms probably won’t get you in a better spot. In fact, you could end up in a really tight one if you take on more than you can handle financially or end up defaulting on the loan. Improving your credit by making payments on time, eliminating existing credit balances, removing late payments, using only a portion of your existing credit, and raising your credit limits are tangible ways that you can improve your credit score in just a month’s time. It can be tough to wait for something like a car, especially if it’s something that you really need. That said, making smart financial decisions can sometimes be hard and holding off for a month might be just what is necessary to put yourself in a good position for the long term.
- Buy a cheaper or used vehicle: Everyone loves the new car smell but buying used in this situation can be better for a lot of reasons. Cars depreciate in value as soon as you drive them off the lot, so you don’t want to end up with a car that is worth less than what you own. Buying a cheaper used vehicle, rather than a brand new one, can be a great way to get a better deal and a lower interest rate. Make sure you know what the car is worth before you purchase it. The price tag doesn’t necessarily reflect the car’s worth so make sure you refer to tools such as Kelley Blue Book. Paying less than the listed price in the book is the goal and will help give you a guideline of what you’re shooting for. Another thing to remember is that you’re going to end up borrowing more than just money for the car because there are fees associated with the car as well. Taxes, titles, and license (TT&L) which must be paid to the government are an added cost that you don’t want to forget about. Factor this in when you’re initially looking at loan options!
- Trade in an existing car: This is helpful for two reasons. One, lenders want to ensure that you have the ability to repay. Having two car payments, one for your existing car and one for the no money down car might worry lenders that you’re a high risk for the loan. That said, if you trade in the existing car you own then lenders know you’ll now only be paying for the one car for which they’re lending you money. Two, if the car is worth more than you owe on it (and thus you have positive equity in your trade-in) then you can often count the difference towards your down payment. This means that whatever that amount is will go towards and decrease what you’d borrow for your new auto loan. In many ways, this is a win-win and you don’t have to come up with a ton of money on the spot. It often allows you to get a lower interest rate as well.
- Don’t jump the gun: If you’re desperately in need of a car, it can be really tempting to go for any deal that allows you to get your hands on some keys but remember to be careful! Jumping the gun on a loan like this will likely only lead to your owing more on the car than it’s worth or having incredibly high-interest rates. Stay calm, do your research, and survey all your options before you jump to getting a loan.
Are you feeling overwhelmed? No money down car loans carry a lot of pros and cons, and you want to think carefully about your financial situation before you take one on. In many ways, they’re appealing because they offer an option for borrowers without much credit to get a car. That said, individuals with poor credit will be likely to take on a loan that is more expensive in the long-term with higher interest rates.
Opting for a small down payment, trading in a car, buying a cheaper or used vehicle, or trading in a car are all ways that you can help mitigate the potential for high payments. If you still decide that this is the right option for you, take a look at your credit score and get started with trying to raise it. The most important thing for lenders is your ability to repay which can be demonstrated in a variety of different ways: your credit score and credit history, a consistent job and residence, and personal bank account maintenance. Once you’ve done the research, get everything together and apply to all lenders within that 14-day period to lessen the impact it will have on your credit score. Follow these steps, and you’ll have the best luck you can with a no money down auto loan!