It seems that just when you desperately need to buy a car, you lack the finances for the required down payment. Auto dealers may be willing to overlook the cash up front, but in return, they demand exorbitant interest rates that may range as high as 12% to 22%. Follow these tips for alternative solutions.
A Minimal Down Payment
Any amount of down payment is recommended because it lowers your monthly payments. Twenty percent is the best amount, but most people in 2015 put down about 10.4% due to the increasing costs of vehicles, according to Edmunds.com. You could put down even less, if you want, or buy a car with no down payment, but the fees and rates are higher.
If you can, wait several months before you buy your car so that you can save up for the down payment. Use that time to boost your credit score, so that auto dealers may be more willing to lower their rates. The problem with no down payment is that it can leave you in an upside-down situation with a car loan. If you want to sell your car, you could end up with a loss because you owe more than its resale value.
Boost Your Credit Report
Credit scores of 680 and higher give you the best chances of persuading a lender to waive your down payment without raising interest rates. Scores between 550 and 680 are considered subprime; the lender may waive the down payment, but it raises your rates. A score that is 550 and below may cause the lender to ignore you altogether.
Your first step is to straighten out your credit report by checking its accuracy, repaying your bills on time, keeping balances low on credit cards and paying off debt. Lenders lower interest rates for borrowers who have steady jobs or regular monthly income, who have lived in one place for at least a year and who have a credit record that shows they can meet their payments.
Get a Cosigner
Another option is to get a family member or friend with a strong credit score to cosign. The person shares the responsibility of payment and ownership, but if you miss a payment, you lower your credit score and that of the cosigner, too. Although a cosigner has no right to the vehicle, there could be disagreement over who owns the car. Getting a cosigner only helps you lower your interest somewhat, since lenders realize that the car is usually for the person with the weaker score and typically offers an annual percentage rate (APR) that hovers around the median range. If you do get a cosigner, share the title ownership of the car, repay your loan on time and keep organized records to prevent disagreement.
Lower your interest rates by shopping around and negotiating. Consider auto dealerships, local credit unions, banks or alternative loan providers. Look for specialized online lenders that offer low-rate auto loans without down payment requirements. Before asking around, familiarize yourself with the most common auto loan rates to avoid being duped by unscrupulous dealers. Research current auto loan rates online.
The Bottom Line
It is possible to buy a car with no down payment, but you run a higher risk of being tagged with steeper interest rates. You can always buy a cheaper used vehicle or trade in your existing car, if you have one that's in good condition, since such steps usually lower your rate, too. In all cases, look for short-term loans that are less than 72 to 84 months long, and avoid extras, such as extended warranties or credit life insurance, that may raise your overall payments.