You see the ads in the newspaper and hear them blaring from the radio: “Get a Used car for zero down!” It sure sounds appealing, but are these offers too good to be true? Can you really buy a car without a down payment?
Yes, you can get a car with no money down, but unless you’re planning to trade in your current vehicle, that zero down payment offer could mean higher monthly payments—and higher costs in the long run. Here’s what you need to know.
Down Payment vs. No Down Payment: What’s the Difference?
Few of us can pay cash for a vehicle upfront, so whether or not you’re making a down payment, you’ll likely be using an auto loan to finance your purchase. However, keep in mind that when you buy a car, you’re not just paying the price of the car. There are additional costs, such as state taxes and registration fees. The dealership may also charge documentation and transportation fees.
If you don’t make a down payment, these fees get rolled into the amount you’re financing. If you’re buying a $25,000 car with zero down payment, for example, you might end up financing $28,000 when all the taxes and fees are added in.
Unfortunately, as soon as you drive your new car off the lot, it begins to depreciate in value—typically by as much as 20% in the first year. If you finance $28,000, and the $25,000 car depreciates by $5,000 when you drive it off the lot, you now have a car worth $20,000 . . . but you owe $28,000 on it.
When you owe more than your vehicle is worth, that means you’re “upside down” on your loan—which is not a good place to be. Second chance loan
Making a 20% down payment helps ensure that even when depreciation is taken into account, you won’t owe more than the car is worth. In addition, making a down payment can help you get better loan terms.