Buying a Car with No Down Payment

So you’re in the market for a new car and while your income is decent, you just don’t have the savings to throw away on a down payment. Understandable, and that is why you should consider these options for getting a new car with no down payment.

The first thing you need to know here is the term “car loan-to-value ratio”. To simplify things, this is the amount a bank will lend you in proportion to the car’s value. A standard loan-to-value ratio for car loans is 90%. That means you could borrow up to $18,000 to buy a $20,000 car. The remaining $2,000 plus all taxes and fees need to come from another source…which is typically your down payment.

Now you can find lenders who offer 100% or even 105% loan to value ratios for new cars. The 105% option would give you some extra cash to pay for taxes and fees, but financing beyond the value of your new car can be costly. Not only will you pay interest charges on that extra money, but it will take more time to build equity in your purchase. The bottom line is you’d better be sure you’ll drive the car for at least 5 years before you finance 100%+ of it’s value.

I should also mention that you’ll need a credit score of around 700 or better to qualify for these types of loans. The bank takes on a substantial risk by lending more money than the car is worth because they will lose big if they have to repossess it. Your own personal debt-to-income ratio will be scrutinized to make sure you can afford the monthly payments.

Now there are other ways to get into a new car without a down payment. In fact, the ones I have listed below are probably better options if you have limited or no savings.

New Car Lease
There are several $0 down lease offers available every month from different car manufacturers. Most of these deals run through the manufacturer’s finance company. You are still going to run into stiff credit stipulations to qualify, and the monthly price you see advertised does not include taxes and fees.

That being said, it is significantly cheaper to lease a car without a down payment because you are only financing the difference between what the car is worth now and when your lease expires. For example, instead of borrowing the full $20,000 sticker price, you are only borrowing the $10,000 worth of depreciation the car will experience over the next 36 months.

Trade In Your Old Car
This is a simple fix to not having a down payment. If you already own a car than sell it or trade it in on your next vehicle. Selling on your own will get you about 25% more than trading it since dealerships only buy at wholesale prices. But no matter how you get rid of your old ride, keep in mind that you’ll need to come up with 10% of the new car’s price along with taxes and fees in order to get a standard 90% loan. For a $20,000 car in Ohio (where I live) that would be somewhere in the neighborhood of $4,000.

Cash Back Offers
Here is another easy way to get enough money to qualify for that 90% loan. Cash back incentives and dealer rebates are similar to grocery store coupons. You basically get a credit towards the purchase price of your new car. So let’s say you found a great cash back deal from Kia that gives you $3,000 off. This is a better-than-average incentive but not impossible to find, especially if you are willing to buy last year’s model. Now you have $3,000 of the $4,000 you need to secure the loan. And since you read my car shopping guide it won’t take you long to negotiate another grand off the sticker price and just like that you are driving off in the sunset!

The lesson here is simple…yes, you can buy a new car with no money down. Having good credit gives you more options to choose from, but a savvy car shopper can get the deal done by searching for the right combination of incentives and finance offers.