When you buy a new car, it is generally recommended to make a down payment. Putting money into a new or new vehicle for you lowers the amount you have to finance, which can help you pay less in interest over time.
You are not always required to pay a deposit. In fact, some car dealers offer no-deposit deals, where you can drive your new car without paying a cent up front.
But while $0 is technically the lowest down payment you can make, it’s not always the best option. Before you buy a new car, it’s worth weighing the pros and cons of making a large down payment, and understanding how it might affect the terms of your car loan.
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How Much Most Buyers Place?
Most lenders do not require a minimum down payment. However, the recommended down payment is 10 percent for used cars and 20 percent for new cars.
For a new car, a 20 percent down payment will usually provide enough equity in the vehicle to cover the rapid depreciation that occurs in the first few months of ownership. That way, the loan amount will not exceed the value of the vehicle.
While 10 percent or 20 percent are common down payment amounts, experts recommend putting as much money on your vehicle as you can afford. That may be as high as 50 percent or as low as 5 percent, depending on your financial situation.
Big Advance Profits
Making a large down payment on your car loan has a number of advantages. Here are a few reasons why you should consider putting a large amount of money into your new vehicle:
Lower Interest Rates
When you make a larger down payment on your car loan, you can qualify for a lower interest rate. Here’s why: Making a sizable down payment indicates that you have sufficient funds to pay off your car loan in full. It also shows your lender that they will most likely be able to cover the remaining balance on the loan if you default on the loan. Borrowers who make large down payments have less risk, so lenders charge lower interest rates.
Easier Approval
Before you can borrow money to buy a car, you must get approval from the lender. When you make a large down payment on your vehicle, it’s easier to get approved for financing. While a large down payment isn’t a guarantee of approval for a loan, it can work in your favor, especially if you don’t have a very good credit score.
More Affordable Monthly Payments
Making a larger down payment on your car loan not only means you pay less in interest, but you also get the added benefit of lower monthly payments. Depending on the term of your loan, you will pay less each month if you make a larger down payment.
Positive Vehicle Equity
When you drive your vehicle from the parking lot, its value starts to depreciate. If you pay a small down payment, you may end up with negative equity in your vehicle, also known as a “flip”. However, when you make a larger down payment on a new car, you are more likely to maintain positive equity. Having positive equity has a number of advantages, especially if you want to sell the car or trade it in before it’s paid off.
Is No Down Payment or Low Down Payment a Good Idea?
If you can’t afford a large down payment on your vehicle, you may be able to take advantage of a zero down payment or low down payment deal. These incentives can help you buy a new car without spending a lot of money (or any money) up front.
The main benefit of putting zero dollars on your car loan is that you don’t have to hand over a large amount of cash for your purchase. You may also be able to buy a vehicle more quickly since it will take you less time to save for a down payment.
However, it is not recommended to make no down payment or low down payment unless you really can’t afford it. Putting anything on a new car loan means you have to borrow more money from the lender and pay more in interest over the life of the loan. You’re also more likely to go backwards on your loans during the first few years.
In the end, a no down payment is not a good way to save money on your car loan. While you can avoid paying early, you’ll actually end up paying more over the life of the loan. It’s just a good idea to put down zero dollars on your car loan unless you can’t afford to put down the money.
Tips for No Down Payment or Low Down Payment
If you’re considering a no-cash payment option, use these tips to make sure you’re covered.
Consider Adding Gap Insurance
Since not putting money on your vehicle means that you will most likely get on your loan for at least the first year, adding gap insurance is recommended. If you total your vehicle in an accident, gap insurance pays the difference between the reduced value of your car and what you still owe. Many car insurance companies sell gap insurance, or it can be purchased directly from the dealer.
Choose a Cheaper Vehicle
If you don’t have the funds to buy a vehicle, you should choose a vehicle that costs less. With a cheaper vehicle, your principal will be lower, so you’ll pay less in interest.
Your monthly payments will also be lower, depending on the length of the loan. Once you start building positive equity in a vehicle, you can use it and the additional money saved to put money in other vehicles.
Try to Get a Co-Signer
If you’re having trouble getting a loan approved because you can’t afford the down payment, consider getting a co-signer. The co-signer agrees to take over the payments if you default on the loan. Getting a co-signer can also increase your chances of being approved for a car loan if you have poor or no credit.
Trade In Your Old Car
If you don’t have the cash for a down payment, consider trading in your old car. The dealer will inspect your vehicle, assess its value, and offer a trade-in price for it, which can be used as your down payment on the next car. However, keep in mind that the trade-in value from dealers is often less than what you can get from third-party buyers. To get the most money from your old car, selling it to a private party may be a better option.
What Lenders Need for Moneyless Auto Loans
Some lenders have requirements for loans without a down payment. While every lender is different, here are some of the eligibility criteria you may need to meet to secure this type of loan.
Permanent Employment History
Most lenders want you to have consistent work. You may need to show that you’ve been at the same job for at least a year, or have held multiple jobs in the same industry. If you don’t have a consistent employment history, it could hurt your chances of being approved for a loan.
Verified Residence
Your lender will look to see if you have lived in your current residence for at least one year. Maintaining a consistent place of residence shows that you have a stable living situation, which is important for lenders to look at. It also shows that you have been able to make the monthly rent or mortgage payments for a long period of time.
Good Credit Score
The lender will check your credit as part of the loan payment application without a down payment. In particular, lenders may look for long-term loans in your credit history and timeliness of payments, along with your credit score.
Low Debt to Income Ratio
Lenders will also see your total debt, such as personal loans, student loans, and money owed to credit card companies. They will compare this debt to your income to get a debt-to-income ratio. This figure helps the lender determine whether you can afford other loan payments in addition to your existing debt.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years experience in finance and personal insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His byline has appeared in dozens of online financial publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.
