No Money Down Car Loans 101

July 6, 2018 Financing & Leasing

There’s no doubt you’ve seen the $0 down payment promotion at a dealership before. You may have even thought it sounds too good to be true. But the truth is, zero down deals do exist. However, it’s important to understand how they work in order to determine whether it’s the right financial option for you.

It’s true — $0 down does mean that when you initially get approved for your loan, you won’t have to make a down payment. But there’s still more to the story.

Getting a car loan with no down payment often means you’ll end up paying more monthly because you’ll have to cover the gap between the cost of your vehicle and the amount of financing you receive.

To help you get more familiar with $0 down payments, we’ll explain the following concepts:

What a down payment means
Why lenders ask for a down payment
How to know if you qualify for a no money down loan
The pros and cons to a no money down loan
How to save for a down payment

What a down payment means

If we’re defining the term ‘down payment,’ you can think of it as the dollar amount that covers the gap between the cost of your vehicle and the amount of financing you receive. It may sound scary to think about shelling out a large portion of your hard earned cash upfront, but in the long run, it will save you money.

For example, if you plan to purchase a $10,000 vehicle and finance $7,000 of that purchase, you’ll need a $3,000 down payment. Makes sense, right?

For the most part, down payments are made in cash but it’s difficult to pinpoint a standard down payment range as they vary based on the lender. If you’re purchasing a new vehicle, the lender may require more money down than if you were to buy a used one in order to offset its quicker depreciation.

There are other alternatives too though. If you’re trading in an existing vehicle, the value of that vehicle can count toward your down payment. Selling your car privately and bringing the cash as a down payment is another option.

At Birchwood Credit, we provide in-house financing, meaning we lend our own money. This allows us to provide you with better monthly rates, repayment terms and even help with your down payment if needed.

Why lenders ask for a down payment

Lenders ask for down payments based on your credit situation. Usually, if your credit score falls in the ‘excellent’ range, the lender may approve you for $0 financing. If your credit is less than perfect, you’ll most likely have to make a minimum down payment of some kind.

Most lenders want to make sure they’ll get their money back if you stop making your monthly payments. A down payment is a way you can show a lender you’re committed to the loan. It indicates you’re not going to walk away from the loan even if your vehicle’s value drops.

Lenders also like when buyers can offer a larger down payment than they originally requested. Not only that, but putting down more money from the get-go often results in you paying a lower monthly interest rate. Though paying more upfront may sound like you’re losing money, it will actually result in your loan costing less in the long run.

How to know if you qualify for a no money down loan

Before a dealership will sell you a car without a down payment, they’ll want to know you’re in good financial health and will take a look at your credit score. A high credit score, generally above 600, may qualify you for a $0 down payment. But if that’s case, you may have to pay a higher interest rate.
Lenders will look at the following key factors before determining whether a customer is approved for a no money down car loan:

Monthly Budget – They look at whether this payment would fit into your average monthly spending habits once you’ve paid your other bills.
Credit History – They’ll look at your credit score and determine how you paid off loans in the past.
Vehicle Choice – They’ll make sure they’re getting a good deal. They don’t want to lend $10,000 on a $12,000 car, so this can be an important factor when getting approved.

When you shop with Birchwood Credit, we always begin by looking at your financial situation and basing our decision on what will work best with your lifestyle. If a larger down payment makes sense and will help lower your cost, we may present that as an option to you.

The pros and cons to a no money down loan

Let’s start with the pros, since we believe there are fewer.

You don’t have to dish out a large portion of your hard earned cash in one sitting. Putting $0 down on a car loan means you don’t have to pay a large portion at once but a little more each month instead.

When it comes to the cons, we have a few more points to add to the list.

You could find yourself paying more than the vehicle is worth. Your vehicle may depreciate in value before you pay off your loan.
Interest rates on no money down car loans are typically higher. Lenders see no money down as riskier loans, which means you’ll end up paying more monthly
You’ll have little equity in the vehicle. This means it will take you months of payments before you can claim a percentage of ownership of the vehicle.

How to save for a down payment

At this point in the post you’ve probably realized, we’re in support of down payments because it allows you to be in control of your loan. However, we also understand that sometimes life gets in the way of your savings and a down payment may not be a viable option.
At Birchwood Credit, we help you get pre-approved for a car loan before picking your vehicle so we know what you can afford before you start shopping.
Here’s a few of tips to help you start saving for that down payment:

Tackle it little by little over time, to make it more manageable.
Put money into a savings account and pretend that account doesn’t exist.
Find one unnecessary purchase you’re making weekly — whether that be coffee, clothing or take-out food — and gradually try to cut it out.
Ask for a receipt after every purchase your make. At the end of the month, combine the total and see where you can save money.

At Birchwood Credit we want Manitobans, regardless of their credit history, to be able to drive a Birchwood vehicle, while also improving their credit score. We’ll help you get into a reliable vehicle, with the option to refinance down the road if payments are made consistently. Auto financing is an effective way to rebuild or establish your credit score, impacting your life and future positively. When you’re shopping for your future car, Birchwood Credit is here to get you on the road to success.