When you're thinking about buying a car and looking for the best financing deal available, you might come across this intriguing combination of words: "zero down car loans." But are zero down car loans legit? And is this type of finance a wise choice for everybody?
Zero down payment car loans, or no money down loans, do exist and are available for customers with good and bad credit.
To get approved for a car without a downpayment, you’ll simply need to get pre-approved for a bigger loan than you’d need with a down payment. If you choose no down payment, either your payments may be higher, or your loan term would be longer since you are essentially borrowing more than you would have needed with a down payment.
For people with good credit, this often isn’t a challenge. But what about bad credit?
Can you get a car loan with 0 down if you have bad credit?
To get approved for no down payment with bad credit, the key(s) are to make sure you're shopping for vehicles you can afford, increasing your credit score, or borrowing someone else's credit score. Here are a few easy options:
Use a free online pre-approval service to see if you can get approved
Once you’re pre-approved, there’s a good chance you can get approved for a car with zero down payment. Knowing your budget before going to a dealership can save you a lot of time because it takes the guesswork out of the process. Many people are denied simply because they set their budget too high.
Pay down some debt
Your credit could be suffering if you’re using more than 30% of the available credit on your credit cards & line of credit. Paying down your balances could give you the credit boost you need to get approved without a down payment.
Get a cosigner
This could allow you to borrow more than your credit might allow. This isn't always an option for people, but many times you can get approved without a cosigner by sticking to your budget.
Why Do Lenders Want Down Payments?
Lenders (or financers) want to protect themselves if you are unable to pay them back. They don’t want you to owe them more on the car than what it’s worth in case the car gets turned back. A down payment covers the gap between the sale price of the vehicle, and its value once it leaves the dealership.
Most often, financers look for an up-front payment or deposit of between 10% and 20% of the value of the car. If you don’t have that amount of money, you can also trade-in a vehicle you already own.
If those options aren’t available to you, you can find lenders and car dealers who offer no money down car loans. This type of loan lets you drive the car off the lot with little to no payment upfront, but it usually comes with higher interest rates—especially if you have a low credit score.
What Do Lenders Look at When Approving Zero Down Payment Car Loans?
A zero down car loan means that the lender is taking on higher financial risk than usual, so a higher rate of interest usually applies. A lender will assess the level of risk and base the rate of interest on the answers they can get to these three questions:
- Can you be trusted to make your monthly payments on time?
- Can you afford to pay the loan back?
- Are you getting good value for the car?
Getting a little further into the details of how lenders assess whether a person with bad or no credit can get approved for a vehicle loan, the lenders will typically look at a few things:
- How much you can afford
Lenders look at how the payment would fit into your monthly budget once you’ve paid your other bills.
- Your Credit History
Lenders want to know how you’ve paid back lenders in the past. This will help them determine the risk of you paying off your new loan obligation
- Your Vehicle Choice
Lenders want to make sure you’re getting a good deal. They don’t want to lend $10,000 on a $500 car so this can be important factor when getting approved.
How Do I Qualify for a Zero Down Payment Loan?
When you apply for finance, a financial lender will want to know how well you’ve paid off loans in the past. In other words, they'll want to check your credit history. Since no money down car loan lenders are taking on higher risk, they will look for the best possible credit scores, so make sure that your credit history is accurate and that your credit score is as strong as possible before authorizing a credit check.
One of many ways to improve your credit score is to widen the gap between your credit card balance and credit limit by either paying off your balance or judiciously increasing your line of credit.
Independent lenders won't approve anything until they are confident that you can consistently make your new monthly payment. Consumer Reports current guideline recommends that your monthly car payment matches 10% of your monthly income. If you can convince a lender that you can afford to make those payments, you’re more likely to qualify.
If you’re unable to secure a zero down option for your first car choice, try selecting a vehicle at a lower price. Remember, new cars lose a lot of value (known as depreciation), the moment they leave the lot, while used cars have less depreciation after their sale, so that can improve your chance of obtaining a zero down loan, as there is less of a gap between the value of the car and the loan amount.
The importance of finding a loan you can afford without a downpayment.
Affordability is the most crucial facet of your new car purchase. Most of us decide what we can afford by calculating whether it fits into our monthly budget or not, yet affordability is much more than your monthly payments.
Affordability is the overall cost to you, relative to the value of the vehicle you’ve chosen. Therefore, you’re more likely to get approved with for a loan with no down payment if your vehicle of choice is selling for a fair price and holds its value well over time.
Many car dealers will ask about how much you'll be able to pay per month. If you can only manage smaller monthly payments, they might suggest applying for a car loan with a longer term to fit your budget. You'll have more time to pay off the loan, and installment amounts will be lower, but you'll generally be paying higher interest for longer.
A knowledgeable lender considers your monthly budget but also analyzes whether the car deal is good value. For instance, you shouldn’t end up owing $25,000 for a car that’s only worth $15,000.
A car deal that makes good financial sense is important to the lender, as that protects them from risk if you can't pay back the loan. And a good value deal protects you too if you ever need to sell your car and pay off your loan. You'll enjoy decent resale value if the vehicle is actually worth close to what you paid for it in the first place.
Can I Get Zero Down Car Loans If I Have Bad Credit?
0 down payment car loans are available to customers with bad credit too. Some lenders appreciate that life has financial twists and turns, and they want to build strong relationships with their clients and help them get the best deal for their new car.
When you’re looking at a car in a dealership, be aware that although car dealers often have affiliated lenders ready to offer you finance options, including zero down payments, they are not required to provide you with the best car loan deal that they have available.
How To Save On a Zero Down Car Loan
A zero down car loan provides you with a car up front in return for payments later. To save money, try to get your term paid off as soon as you can. If you do get approved for a no money down loan, try to commit to the shortest term you can manage.
Long term loans may be tempting, but in the long run, they’ll usually cost you more. It’s a good idea to add a few dollars on top of your monthly payments as often as you can. Getting your loan paid off quickly means you can sooner wave goodbye to interest payments.
Canada Drives Can Help You Get a Car With Zero Down Payment Near You
If you, like a lot of Canadians, need a car loan but have less than perfect credit, we can help you get approved for a car loan. Canada Drives has many years of experience working for Canadians with all types of financial situations. Team up with us. It takes just two minutes to complete our application! We'll help you find the best deal in no time.
Hopefully, this article has demystified some of the unknowns surrounding car loan financing. If you’re interested in learning more, read other articles from our Fact or Fiction series. In one article, we look into 0% interest car financing to give you the facts, and in another, we provide a comprehensive breakdown of no credit check loans.