Given the economic climate of recent years, we’ve increasingly seen consumers who need to finance a car despite two major setbacks: bad credit and no down payment. Neither of these challenges is a deal-breaker in and of themselves. However, together they can be a tough combination to overcome. Both of these factors make the loan a riskier proposition for lenders, which has two consequences:
- More Difficulty Getting Approved
- High Interest Rates Once Approved
Fortunately, we can help you connect with lenders and dealers who help people in just such scenarios. All you have to do is take advantage of our online application service. We will go to work placing your application with a dealer or lender who understands your unique financial situation, and who is willing to fund your loan. However, before you apply, you may want to read on and learn more about how these loans work.
The Dangers of No Money Down Financing
In most cases, a no money down is just what it sounds like: a loan for the full value of the vehicle being financed, with no down payment. This is commonly referred to as 100% financing, because 100% of the vehicle’s value is being paid for through the loan. Unfortunately, predatory dealers may simply defer your down payment by rolling into your loan amount, often in addition to an assortment of closing costs and fees designed to increase their profit margin on the transaction.
Sure, your out-of-pocket expenses of the day of purchase may be low, but you’ll be paying much more each month. After all, you know have a bigger loan than you otherwise would. Additionally, when you combine these extra fees with the high interest rates associated with subprime credit, you could quickly find yourself paying far more for your new vehicle than it’s worth. This brings us to a second worry: negative equity.
No Money Down = Upside Down?
As you know, cars are notorious for losing their value quickly and steeply. A down payment serves to counterbalance this loss of worth. After all, if you finance 100% of a new car’s worth, and it’s worth just 80% by the time you park it in your garage for the first time, then you’re looking at an inequity of 20%. For a $20,000 car, you would now be $4000 “in the hole,” as it were.
Now, some people aren’t too worried about negative equity, because they don’t plan on trading in or selling their vehicle until it’s fully paid off. These are those owners who “drive the wheels off” their cars, and if you want to finance a car with no money down, this is the kind of driver you should be.
Avoiding Dealer Scams
We already discussed the dealer practice of rolling closing costs and down payments into the loan principal. Fortunately, the law is on your side, in that dealers and lenders are required to be transparent about lending practices.
- Make your salesperson or loan officer show you the full documentation on their lending program. If they are hesitant to do so, this might be your first warning sign.
- Ask him or her to walk you through all of the numbers, including the exact amount you’ll be borrowing (principal), how much you’ll ultimately pay in interest, how much you’ll have spent before the vehicle is paid off, and ask them enumerate every single fee you’ll be paying.
- Make sure the financing agreement does not come with prepayment penalties or allow for variable rates of interest.
If you detect any red flags through these discussions, simply walk away. Don’t let new car fever get to you. Financing a vehicle is an enormous financial commitment, and you need to understand every last detail before signing on the dotted line.