No Money Down in Car Buying

Some dealers require no money out of pocket to buy a car.

Some dealers require no money out of pocket to buy a car.

If you lack a pile of cash to put toward the purchase of a car, you can finance the full price with a zero-down auto loan. Just like the options and packages available on a car, loan terms vary widely among dealers and lenders. A higher loan amount and interest rate are just two of the common characteristics of a zero-down loan.

Potential Costs

Before rushing to a dealership with nothing but a pen to sign paperwork, be sure to ask what money, if any, you must pay out of pocket on a zero-down loan. While some dealers are happy to add taxes, registration and other closing costs onto your loan, others might require you to pay these costs up front. Such costs can amount to several thousand dollars and can turn a no-money-down loan into a some-money-down loan.

Interest Rate

Aside from the occasional promotions featuring zero percent financing, you generally pay a higher interest rate on a zero-down loan. Because you aren’t sacrificing any of your own money in the deal, a lender sees a zero-down loan as a higher risk for which it wants to be compensated. A higher interest rate increases the total amount you pay over the life of the loan, so you must determine whether the extra cost is worth waiving the down payment.

Loan Amount and Payments

A zero-down loan results in a higher loan amount than if you make a down payment to purchase the same car. For example, a zero-down loan on a $20,000 car would be $20,000. Making a $3,000 down payment would reduce the loan to $17,000. With all else being equal, the higher loan amount requires a larger monthly payment. You save some cash today to pay a little more each month in the future.

Underwater Loan

Cars typically decrease in value as soon as you drive them off the lot. If you have a zero-down loan, you might owe more than your car is worth. Regular auto insurance covers only the value of your car, so you’d be on the hook for the rest of your loan if your car gets stolen or totaled. With a quick call to your insurance carrier, you can add gap insurance to your policy, which covers you for the difference between your car’s value and your loan amount.


About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.

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