Buying a Car: The Down Payment Dilemma

Making a down payment when financing a car is standard practice—but with new car prices rising steadily for the past three years, the size of a down payment is growing, too. The average new car costs $48,275, according to Kelley Blue Book data, pushing a 20% down payment to $9,655. Don’t have that kind of cash on hand? It’s possible to buy a car with no down payment, but you might not receive the best loan terms, which could ultimately mean paying more for your vehicle.

Do Car Loans Require a Down Payment?

You generally don’t need a down payment to get a car loan, but it’s in your best interest to make one. A down payment of any size reduces the amount you need to borrow, so your loan will cost less. Compared with a bigger loan with the same terms, you’ll have lower monthly payments and pay less interest over time.

Curious how much difference a down payment could make? Suppose you have no down payment and get a 60-month car loan for $48,275 at a 6.97% annual percentage rate (APR), the average interest rate as of the first quarter of 2023. You’d have a monthly payment of $955.22. Throw in a 20% down payment of $9,655, however, and you only need to finance $38,620. That cuts your monthly payment to $764.18, saving you almost $200 a month, or nearly $11,500 over the life of your loan.

Pros and Cons of Buying a Car With No Down Payment

Buying a car without making a down payment has both positives and negatives.

Pros of No Down Payment

• Get a car right away: Instead of waiting months or years to save up for a down payment, you can buy a vehicle immediately.
• Keep more cash in hand: Not making a down payment gives you options to use your savings for other goals, such as building an emergency fund or making a down payment on a house, or even funneling into your loan payments.

Cons of No Down Payment

• Higher monthly payments: Without a down payment, you’ll have to finance the full cost of the car. Associated costs such as state taxes, registration fees, and dealer documentation and transportation fees will also get rolled into the amount you’re financing. A bigger loan means a bigger loan payment.
• Increased interest charges: Depending on your creditworthiness, income, and other factors, lenders may offer less favorable terms and higher interest rates without a down payment. Even at low interest rates, financing a larger loan amount means you’ll pay more interest over the loan term—especially if you need a longer loan term to make your payments affordable.
• Risk of negative equity: New cars depreciate an average of 20% in the first year. Without a down payment, you’ll soon owe more than the car is worth (known as being “upside down” on your loan).

How to Buy a Car With No Down Payment

If you want to buy a car with no down payment, taking the following steps can help you qualify for better loan terms.

Check Your Credit Report and Credit Score

Make sure your credit report is up to date and accurate, and see where your credit score falls. It’s possible to get an auto loan with just about any credit score, but the higher your credit score, the better the terms you can qualify for. Although auto lenders typically use a different credit score than the one you see when you check your own credit, your FICO® Score☉ is a good indicator of what lenders will see.

FICO® Scores range from 300 to 850 and are divided into five tiers:

• Exceptional: 800-850
• Very good: 740-799
• Good: 670-739
• Fair: 580-669
• Poor: 300-579

Good to exceptional credit generally translates into lower auto loan APRs. For example, the average auto loan APR for borrowers with FICO® Scores of 720 is 7.062%, according to FICO. Borrowers with scores of 589 pay more than double that, however, with an average APR of 17.136%.

Improve Your Credit

If your credit score isn’t where you’d like it to be, take the following steps to help improve your credit.

• Bring any late accounts current.
• Pay all your debts on time. Setting up autopay can ensure you don’t miss a due date.
• Pay down existing debt to lower your credit utilization ratio.
• Avoid applying for new credit.
• Consider signing up for Experian Boost®ø, a free feature that includes on-time utility, streaming, and cellphone payments in your Experian credit report, which can help improve your credit score.

Shop Around for Loans

While you can finance your car through the auto dealership, that’s not always the most affordable option. Before visiting the car lot, check current auto loan rates online and investigate loan options from banks, credit unions, or online loan marketplaces. Filling out a preliminary loan application and getting preapproved for an auto loan can give you a good idea of the loan amount and terms you may qualify for. Preapproval can also give you some leverage to negotiate better loan terms with the dealer.

Limit your loan applications to a short period of time to reduce the number of hard inquiries on your credit report. Too many such inquiries can lower your credit score, but lenders typically treat multiple inquiries within a few weeks as one inquiry.

Compare loan offers, considering the APR, how much you plan to borrow, and the length of the loan. (You can use Experian’s car loan calculator to determine the monthly payment and ultimate cost of any loan you’re considering.)

Why You Should Consider Buying a Car With a Down Payment

Making a down payment when buying a car has several benefits, including:

• Lower monthly payments: A larger down payment means a smaller loan. Compared with a loan with the same terms but no down payment, your monthly payments will be lower.
• Shorter loan term: Borrowers often choose a longer loan term to reduce their monthly car payment. However, this ultimately costs you more in interest. A down payment can make it easier to pay off your loan faster while also keeping your payments affordable—and save you interest in the bargain.
• Better loan terms: A smaller loan means less risk for lenders. If you have poor credit, making the largest down payment you can afford could convince lenders to offer you more favorable terms.

The Bottom Line

If you don’t have money for a down payment and can’t qualify for the loan terms you’d like, consider other options. For example, looking for a lower-priced car or a used car could help you buy a vehicle that fits your budget even without a down payment. Can you postpone your purchase for a while? Saving for a car down payment may take a while, but can pay off financially—especially if you work on improving your credit at the same time.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with the best loan options tailored to your needs.