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No-Money-Down Car Loans: What You Should Know
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A no-money-down car loan could allow you to buy a vehicle when you don’t have cash for a down payment. Low annual percentage rate (APR) auto loans with no down payment are primarily offered to borrowers with high credit scores, but there are ways to secure no-money-down car loans with less sweat.
Shop around for no-money-down car loans
If you apply to a few no-money-down car dealerships near you, then you could compare offers — and even use them to try to get a better one. For example, if Dealership A offers you a 15% APR auto loan and Dealership B offers you a 12% APR auto loan, you could go back to Dealership A and ask it to beat the other dealer’s proposal.
Besides a dealership, potential lenders could include banks, credit unions or online lenders. You can fill out one online form on LendingTree and — depending on your creditworthiness — get up to five loan offers from lenders.
It doesn’t hurt your credit to apply to multiple lenders for the same type of loan any more than it does to apply to one lender as long as you submit your applications within a 14-day window.
Where can I get a car with no down payment?
No-money-down car loan dealerships or no-down-payment car lots aren’t known for offering the best deals, but there are lenders that will work with fair- to bad-credit borrowers. Dealers are typically able to inflate consumers’ APRs by two percentage points. Know what rate you deserve by getting an offer directly from a lender of your choice before you to a dealer.
Capital One, one of the largest banks in the U.S., offers rates competitive with other large lenders. The lender considers all types of credit, though it requires an income of at least $1,500 a month. It offers prequalification with Auto Navigator (its auto lending program).
Here are details on Capital One auto loans:
- Average APR was 7.02% for consumers who closed a loan with Capital One on the LendingTree platform across all credit scores in the first half of 2021
- Loan terms up to 84 months
- Loan amounts starting at $4,000
- Vehicle models must be a 2010 model year or newer and have less than 120,000 miles; in some instances, a car may be 2008 or newer with less than 150,000 miles
Carvana is an online car dealer that also brokers car loans. They offer the convenience similar to a dealership — find your car and your car loan in one place — and they do it all online. They have no minimum credit score threshold, but they do require that customers have no active bankruptcies and make at least $4,000 a year. Another limit is that Carvana financing can only be used for Carvana vehicles. You can’t take a loan offer from Carvana and use it at a different dealership.
Here are details on Carvana auto loans:
- Average APR was 12.88% for consumers who closed a loan via Carvana on the LendingTree platform across all credit scores in the first half of 2021
- Loan terms up to 72 months
- Car loan offers are good for 45 days to give you time to decide
What credit score is needed to buy a car?
Some lenders don’t set a minimum required credit score to buy a car. Instead, these lenders can focus on your income and debt and factors such as the loan-to-value (LTV) ratio, which is how much you borrow for a car compared to what the car is worth.
People with credit scores of 601 and above hold the majority of auto loan debt, according to Experian’s State of the Automotive Finance Market in the second quarter of 2021.
Experian reports that deep subprime borrowers with credit scores of 300 to 500 received an average interest rate of 20.58% on used vehicles. For super prime borrowers with credit scores of 781 to 850, the average interest rate on used vehicles is 3.66%. While these figures don’t directly take down payments into account, it shows general differences based on your credit score. It is possible to get an auto loan with no credit or low credit, as well as those who have gone through bankruptcy, but it will cost more.
No-down-payment car loan: How to borrow less
It’s important to a lender that a car is worth more than what you borrow for it. Here are ways to borrow less without making a down payment.
NO. 1 Get a good price on the car
You can do what lenders do to determine how much you should pay for a specific car by using free tools such as Kelley Blue Book (KBB) or Edmunds. The goal is to pay less than what the car is listed for in one of these guides.
Dealerships like to price cars as high as possible, though the price of a car isn’t necessarily how much it’s worth. If a car is worth $10,000 but you only need to borrow $8,000 for it, that’s a good deal on the car — and you could probably get a good deal on the loan.
NO. 2 Don’t get add-ons
Many things, from fancy appearance packages to extended warranties, can increase the amount you’re borrowing and make the loan more expensive for you. Dealerships often will push for you to buy these types of add-ons, no matter the car in which you’re interested. These products are usually overpriced, so keep saying no if you don’t want them. The one exception to this is GAP insurance, which could be useful to you in a no-money down car loan, especially if you get a good price on it. Lenders and auto insurance companies offer it, so you can shop around for it. A good price on it is $300 for the whole loan term.
NO. 3 Ask for the ‘out-the-door price’
Remember that with a $0-down-payment car loan, you aren’t just borrowing money for the car — you’re also borrowing money to pay for the taxes and fees on the car.
The rule of thumb is that tax, title and license (TT&L) fees add up to 8% to 10% of the car’s price. So, on your $8,000 car, you’ll really need to borrow between $8,640 and $8,800, which will be your out-the-door price. In this case, the total amount you’re borrowing is still less than what the car is worth in the above scenario — $10,000.
NO. 4 Trade in your current car
If you currently have a vehicle, trading it in could help.
- One car payment is better than two. Lenders want to know that you’ll be able to pay them back. If you have two car payments, you would probably have a harder time paying both. If you trade in your current car for which you’re still making payments, lenders could see it as positive that you’re no longer making two different ones.
- Positive equity can count as a down payment. If you have positive equity in your trade-in — that is, if it’s worth more than what you owe on it — that difference can count as a down payment. Say your trade-in is worth $4,000 and you only owe $1,000 on it. The difference goes toward decreasing what you would borrow for your new auto loan.
NO. 5 Consider a small down payment
Yes, this goes against getting a no-money-down car loan. But you don’t have to put down thousands of dollars to make a difference. Even a hundred dollars could be enough to show a lender that you’re serious about getting a car.
A small down payment could improve the LTV ratio and help you to get a loan or lower APR. And it could help prevent you from being underwater on the car loan down the road because your loan balance is higher than the resale value.
How to negotiate for a no-money-down car loan
If a lender said it requires money down or the APR is too high for you, you could point out some negotiation tactics to prove you’re creditworthy enough for a zero-down auto loan. These include:
- Steady employment: If you’ve been employed at the same place for at least a year, that shows job stability.
- Good income: The higher your income, the more likely it is the lender will see you as capable of making the auto loan payments.
- Reliable residence: If you’ve lived in the same place for a year or more, that shows stability.
- Credit history: Even if your credit isn’t great, paying off another loan on time could be a major point in your favor.
- Low debt: If you don’t have many other outstanding loans, such as student loans, or your other debts, such as rent, are low compared to your income, that could show you’re more easily able to pay back a car loan.
- Personal bank account: Some lenders offer rate discounts when you set up automatic payments, which could require a bank account.
You can make these cases to the lender or a dealership salesperson directly. It’s always a good idea to shop for a preapproved auto loan before you go to the dealership.
4 final tips when shopping for a no-money-down car loan
Shop around for a no-money-down car loan like you would for a car. Don’t be afraid to tell the lender or the dealer why you’re creditworthy. Use multiple loan offers to get a better deal. Find out how much the car you want is worth and don’t pay more than that. Use a trade-in to your advantage.
We’ve discussed various things you should do as you shop for no-money-down car loans, but here are some final tips:
- Consider a cosigner. Another person cosigning for a $0-down car loan could really help your chances of approval, especially if the other person has good income or good credit.
- Make sure the car you’re getting is reliable. You don’t want the car to die before the loan is paid off. You also don’t want to have to pay repair bills while you’re still making car payments. You can read about how to avoid buying a lemon car.
- Look at the total cost, not just monthly costs. Try to borrow with the shortest loan period you can afford. Don’t get an 84-month loan if you can make the payments on a 60-month loan without financial problems because you’ll pay much more in total costs for the longer loan, which is money out-of-pocket.
- Be wary of “buy-here, pay-here” places. Used car lots that offer to finance you themselves usually offer no-money-down car loans — but at high interest rates. They could require you to buy extra things that add thousands of dollars to your loan.
FAQ on no-money-down car loans
How can I get a car with no down payment?
You could get a car with no down payment if you have good credit, a trade-in with positive equity and/or get a good deal on the car you’re buying.
What credit score is needed to buy a car with no money down?
Typically, the higher your credit score, the better.
Can I get a car loan with a 500 credit score?
You may be able to get a car loan with a 500 credit score. Two big things that could help is a cosigner and a down payment.
Should you ever put money down on a car?
It is recommended that you make a down payment on a vehicle, especially a new vehicle, because cars depreciate quickly. Being underwater or upside down on a car loan is when you owe more money on the car loan than what the car is worth. This is financially dangerous as it could trigger a cycle of debt. Here are 7 ways to get out of an upside down car loan.