What is a no down payment auto loan?

If you want to buy a car and you can’t afford the full cost, a no down payment car loan can help tremendously. One zero down car loan is the one that doesn’t require a down payment and covers the cost of the entire car – including its taxes, fees and registration fees. But how can a car buyer qualify for a no-down payment loan, and is it a good idea to get one?

How can I benefit from a car loan without down payment?

A client signs a contract | Guenter Schiffmann/Bloomberg via Getty Images

For a car buyer to qualify for a zero down payment car loan, most banks want them to have a credit score of at least 600 or higher. But your credit score isn’t the only deciding factor. Banks, or lenders, will also look at your credit history, debt-to-equity ratio, and income. If these factors are in order, you will have a better chance of receiving a car loan without a down payment.

The advantages of a car loan without down payment

A 0% financing sign on the window of a car dealership.
A 0% financing sign on the window of a car dealership. | Tim Boyle/Getty Images

There are a few advantages to buying a car with a no-down payment loan. According Capital onesome of the main benefits include:

  • You can buy a car with no cash on hand, which makes buying a car cheaper in the short term.
  • You can spend the money you would have spent on a down payment on something else or save it.
  • Having a car loan will help improve your overall credit score

By taking out a car loan with no down payment, you can buy a car directly and increase your chances of obtaining another loan in the future. However, this type of loan also has disadvantages.

The disadvantages of taking out a loan with no down payment

A client talks with a sales consultant.
A client talks with a sales consultant. | J. Conrad Williams Jr./Newsday RM via Getty Images

It may seem like automotive heaven to buy a car without getting your cash out, but it’s not the perfect method. Here are the potential downsides of using this method:

  • You will pay more interest over time: Remember that a no down payment car loan means that you will not have a down payment, but you will still have to pay the interest. Since the amount of interest on the principal is higher, you will likely pay more interest over time.
  • Higher interest rate: To add to that last point, a cashless car loan will generally have a higher interest rate since you’re not putting up any collateral, and the loan-to-value ratio will be higher.
  • Upside down on the auto loan: Since the loan amount on the car will be higher than if you were to make a down payment and the value of the car depreciates, you are more likely to be up on the loan.
  • Higher monthly payment: Without a down payment, the loan amount will be higher, resulting in higher monthly payments.

Is it worth getting a no down payment loan?

Yes, as long as you can afford the monthly payments. One of the keys to getting a no down payment loan is buying a car that you can comfortably afford. This way you can ensure that you will be able to repay the loan in the time required. Otherwise, it might be a good idea to put a down payment on a car loan if you plan to buy a more expensive car or need lower monthly payments.

RELATED: Is it a good idea to make a “principal only” payment on a car loan?

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