Qualifying for a car deal with no down payment likely means having good credit and qualifying income. However, if you are a borrower with bad credit, you would have a hard time qualifying for a no down payment auto loan. Plus, down payments are generally a great idea for borrowers of all credit lines!
Is Zero Down a bad idea?
Going for a car loan with no down payment isn’t a bad thing, but with a lower credit score, that’s unlikely to happen. Most bad credit auto lenders require at least $1,000 or that you bring at least 10% of the vehicle’s sale price to the table. Down payments are a requirement of most subprime (bad credit) lenders, and are often referred to as having “skin in the game.”
Research shows that borrowers with skin in the game are more likely to take out a car loan. For a lender, a borrower who makes a down payment in a transaction is more likely to make payments, complete the loan, and avoid default. It also means a greater likelihood of qualifying for the auto loan.
Down payments can expand your vehicle choices because they allow you access to more expensive cars that exceed your pre-approved amount. If you’re approved for a $15,000 auto loan but can’t find anything for your situation, adding a larger down payment can open up more vehicle choices. In this scenario, if you have your heart set on an $18,000 vehicle, coming in with a $3,000 down payment could put it in your price range.
More down payment benefits
Car loans are generally simple interest loans, which means you pay interest on the principal of your loan. If you combine a large loan amount, a high interest rate and a long term, it may mean paying more than your vehicle is worth.
High loan amount + high interest rate + long term loan duration = pay more interest charges. A down payment can combat this and help you save money.
For borrowers with poor credit, a high interest rate could mean paying more for your car loan, but a down payment can soften the blow.
Down payments can also protect you from negative equity. Negative equity is when you owe more on the auto loan than the value of the car. Vehicles depreciate, which means they lose value over time, and it never stops.
Negative equity causes problems for borrowers when it is time to sell the vehicle. If you owe thousands more on the loan than you can sell the car for, you may not be able to sell the car. You must repay the loan before you can transfer ownership of the vehicle.
If you finance a vehicle for $10,000, that car might not be worth $10,000 a year. Most used vehicles lose about 10-15% of their value each year. New vehicles can experience a decline in value of around 20% within the first 12 months of ownership! Having a down payment can help keep your car loan in an equity position, which means you’ll likely have less trouble selling the car if you need to.
How much should I save for a down payment?
Your down payment requirement largely depends on your credit score and the size of the loan you are applying for. As mentioned, saving at least $1,000 is probably a good place to start if your credit score isn’t perfect. But if the vehicle you want is expensive, that could mean you’ll have to shell out more money than that to qualify for the loan.
The amount you need to save may also depend on your monthly budget. If you want a specific vehicle but the monthly payments are too high, you can put in more money to lower your payment and make the loan work for your situation. You can use our auto loan calculator to estimate how much you might need to set aside to get your car payment where you want it.
You also don’t need hard cash to meet a down payment requirement. Equity trades can completely satisfy a down payment requirement if there is enough value, or you can use a combination of cash and your trade. If you have a car you’d like to trade in, research its estimated value on sites such as NADAguides and Kelley Blue Book to see what a dealer can offer.
The bottom line with installments is that you should save as much as you can afford. Even if you qualify for a no down payment car loan, putting money into your next car loan will only bring you long-term benefits.
Where can I find car loans for bad credit?
If your income or credit score isn’t quite up to snuff, you can expect to need a down payment to qualify for vehicle financing. You may also need to work with the right auto lender to get the auto financing you need.
With a lower credit score, you not only face a down payment requirement, but also the difficulty of having to find an auto lender who can work with poor credit. Most traditional auto lenders prefer borrowers with good credit. If your credit score is rough around the edges, applying for vehicle financing from a special financing dealer might be the answer.
Special financing dealerships are signed up with subprime lenders. These lenders specialize in helping borrowers with credit issues and look at more than just your credit reports and score. They require a down payment, but they can often work around tough credit terms.
To Auto Express Credit, we’ve built a nationwide network of finance dealerships and want to help you find one in your area. To be matched with a dealership near you that offers bad credit loan options, complete our free auto loan application form.