You’ll see ads for $0 down car financing everywhere, on billboards, in magazines, inside dealerships, and anywhere the car-buying public might go. But are they a good idea?
We asked our auto loans team to outline the pros and cons of no money-down auto loans to provide the information you need to make up your own mind.
Do You Have the Funds to Pay the Loan as Agreed?
This is an essential step; you could have fantastic credit, but it doesn’t mean you can afford to make the monthly payments.
The current underwriting requirement for a car loan is a debt-to-income threshold of 40% or lower. So, for the sake of easy illustration, if you earn $10,000 per month, the maximum amount of debt you can have is $4,000, and that includes the new car loan.
The average car payment can easily reach $800 a month, and that is not factoring in maintenance and insurance. So if you have a significant amount of room in your budget, it will make the entire car buying experience more pleasant for everyone involved.
Pros of $0 Down Car Financing
There are definite benefits to no money down car loans.
No waiting to save for a down payment: If you need a car now but don’t have a down payment, $0 down car financing gets you what you want now.
Keep your savings for something else: If you do have some savings but not enough for the down payment, you can keep it safe for emergencies, or until you have enough for a down payment next time.
Cons of $0 Down Car Financing
There are some downsides to no-money-down auto loans though.
Higher interest rates: Some no-money-down auto loans can attract higher rates because the lender is assuming most of the risk. The rate is their way of minimizing the potential loss if you default.
Negative equity: A down payment can also insulate you from negative equity as any loss of value in the car will be offset by the money you put down. This isn’t an issue if you plan to keep the loan but may become troublesome if you cash in early.
Higher credit score requirement: If the lender is assuming more risk, they want to be sure you’re a good bet. $0 down car financing generally has a higher credit score requirement than standard loans.
Not all lenders offer them: Not all popular lenders offer no-money-down auto loans. Sometimes, you’ll need to go directly to a dealership to get what you want. We have access to some lenders willing to offer them though, so give us a call first.
As you can see, on balance, no $0 down car financing more downsides than positives. They can work in some situations but if you have an alternative, you will likely be better off using it.
They can be expensive, they attract higher interest rates and you’ll have very little equity in the car for quite a while. They are an option to get you out of a situation but they aren’t always the best option.
Or save for a down payment. Yes, it takes time but unless you’re in a rush or need a car right now, it makes much better financial sense.
If you need a no-money-down auto loan in and don’t have the time to wait, contact one of our team and we will help.
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!