It is possible to buy a car without paying a down payment. You have to finance your purchase by taking a loan or by paying the entire cost. However, experts recommend putting a down payment on a car. Here are the reasons why such a practice is financially wise.
What is a down payment on a car?
When you pick the car that you prefer to buy, the seller will request a down payment. The down payment on a car is usually a percentage of the total car price you have to pay upfront. You can pay the remaining amount within a time frame allocated by the dealer. Sometimes, you can trade-in your old model as a down payment. It is more of a sign of commitment from your side. Before you make the payment, make sure to read the terms of the contract. In some cases, the down payment amount is nonrefundable if you plan to skip the purchase.
If you are buying a new car, usually the down payment is more than 20%. For used vehicles, you can bargain up to 10% of the total car price. Here are the top reasons why paying a down payment on a car is beneficial for you.
Reduce interest with a down payment on your car
The main factor that affects your interest rate for a car loan is the loan amount vs. car value. When you pay a part of the car value as a down payment, you will be requesting a smaller loan amount compared to the asset you are planning to buy. Thus, it would reduce the total interest of your loan.
For instance, for a car loan of thirty thousand dollars, you will be paying 4.5% interest for five years, which would amount to $3.5 thousand. If you are paying 20% of the car value as a down payment ($6 thousand), your interest rate will be $2.8 thousand. You will be saving $711.
Faster car loan approval
Since you are requesting a loan amount lower than the car’s value, you are more likely to receive a car loan (provided your credit score is good). Moreover, a down payment on a car from your side shows your commitment to owning a vehicle, which would increase the loan process speed.
Smaller monthly payment
Your monthly loan payment after the down payment will be lesser and even shorter (number of months of payments). Thus, you can easily pay off the loan or afford to buy a better car. However, make sure to buy a car that you can afford without defaulting to any monthly payment. The interest accumulated due to defaults would nullify the benefits of the down payments.
Avoid upside down with car down payment
When you drive a new car out of the showroom, the value of the asset reduces by 25%, even if there is not even a scratch on the car. Thus, within a few seconds, the value of your automobile becomes lower than the loan amount. This situation is upside down. Such a situation would make it hard to trade or sell your car without loss. On the other hand, if you had paid 20-30% of your car value as a down payment, it would be easy to break-even, in the case you wish to sell or trade-in your new car.
What if I cannot make the down payment?
It is not an uncommon situation for a buyer to find the down payment amount to be too high. In such cases, one can buy gap insurance. Say, you are trading your car, or your car is getting totaled. The insurance will fill the difference between what you own (loan) and the current value of the car.
In some cases, getting a co-signer will help you qualify for a car loan or purchase without a down payment on a car. However, it does not give the advantages of making a down payment.
Get better deals
If you are ready to pay down payment, you are a viable customer for the seller. Thus, the seller would most likely be open to better deals or discounts. If you have a bad credit score, paying a larger part of the car value as a down payment would make you eligible for better loan deals too.
Avoid down payment scams
Make sure that you have the adequate cash to make the down payment. Do not fall for hold checks scams, where you offer to pay the balance down payment as monthly installments before buying the car. However, the dealer would not add those payments to the log, and there will be no proof on your end.
Do not pay a small holding fee under the table for the dealer to hold the car for you until you make arrangements for the down payment. There will always be new cars in the market, or you can find cars that you can afford.
When you pay a down payment, request a bill with the amount mentioned and the car model. Even if the car dealer has uploaded the details in his log, you need a copy for your keepsake.
Is zero-down payment offer, a scam?
Such zero-down payment offers are not necessarily a scam. If you have better credit scores or if you have cash for full payment of the vehicle, it is a good option. However, if you are planning to take an auto loan on such purchases, the lenders would have higher interest for you.
Before you make any purchase or down payment, shop around. Look out for three or more dealers of the same brand. There are several online sites that help compare such deals. Talk to your lender about the options you have for loans. Are you trading your old car? Hire a mechanic to repair and valuate your car before you blindly barter it.