Do You Have to Put a Down Payment On a Car?

In an ideal world, automobiles run flawlessly for several years, only to be replaced after you’ve managed to save up just the right amount of money to purchase a new one. That’s far from how things work though. Cars break down and repairs are often costly.

If you’re tight on cash but need a new car, then you may find that you don’t have enough cash for a down payment. The good news is that in some situations, you can buy a new car without a down payment. The bad news? It may not be the best choice for your long-term finances.

How Credit Affects the Need for Down Payments

Looking for a car often means researching the multitude of options, but before you start perusing lots and listings, there’s one important number you need to check – your credit score. Over one million American’s rely on loans to purchase an automobile, and as such, credit scores play a vital role in determining what rates and terms you’re eligible for and, as you may assume, whether or not you can make a purchase without a down payment.

Those who have an excellent credit score may find that special financing offers, specifically those that boast of “0 down and 0% APR”, are well within their reach; however, according to Edmunds, only 10 percent of shoppers actually qualify for that type of financing. However, even consumers with good credit may still be able to capture a zero-down offer, though 0% financing likely won’t accompany it.

Despite the fact that good credit may earn you the ability to forgo that down payment, the lack of cash up front can increase your overall APR, making your loan more expensive in the long run. For that reason, even those would good credit who have the option to skip the down payment should consider making one – even if it’s meager.

As the pattern would suggest, those with poor credit will likely find it difficult, if not impossible, to secure an auto loan without a down payment.

Benefits of Down Payments

Parting with a lump sum of cash up front may not be ideal, but when it comes to auto loans, a down payment can save you money. One of the reasons for this is the impact a down payment has on your monthly payment. Those that make a down payment need to borrow less and often obtain better rates, both of which can translate to lower monthly payments.

In addition to securing more affordable monthly payments, a down payment can help you avoid becoming “upside down” on your loan. Being upside down on your loan means that you owe more than the car is worth, or when the car depreciates beyond the loan balance. As such, consumer should strive to put at least 10 to 12 percent down on their car, though many experts recommend putting 20 percent down if the goal is to avoid being upside on the loan.

Buying New vs. Used

New cars are notorious for significant depreciation within the first year – 20 percent according to Kelley Blue book – so if you’re really strapped for a down payment, you may want to consider looking for a used model, as used cars depreciate at a slower rate.

It’s worth noting that your decision should be based on a full calculation that includes your interest rate (without a down payment) as well as anticipated depreciation and any warranty perks that you’d lose with some older models.

Options for Those Who Can’t Afford a Down Payment

If you can’t make a traditional down payment, consider the following options:

• Good credit can open up a world of financial opportunity, often at a more affordable rate. If you absolutely can’t, or don’t want to, put up a down payment, consider taking the time to boost your credit before buying.
• Use your trade-in: Just because you don’t have cash on hand doesn’t mean you don’t have a viable down payment. Most dealerships will accept a trade-in as your down payment, so discuss your options with the dealer. Be sure to come armed with adequate research (e.g., Kelley Blue Book, Edmunds, etc.) so you get the most for your vehicle.
• Ask about available rebates: If your car purchase is eligible for a manufacturers rebate, consider negotiating with your dealer to use the rebate as the down payment.

Buying a car doesn’t automatically translate into the need for a down payment. Many dealers offer $0 down specials for buyers with excellent or good credit; however, if you can come up with enough cash for even a small down payment, it’s typically in your best interest to do so. A down payment can help you secure better financing, lock in lower payments, and potentially avoid being upside down on your auto loan.

Long answer short? In some cases, a down payment isn’t essential, but you should do everything in your power to come up with one or work with the dealer to come up with an alternative down payment (e.g., rebate or trade-in).