Can you buy a car without offering a down payment? The simple answer is yes. Yes, you can purchase a car with no money down. However, is it the smart move to make? Well, that depends. Unless you’re planning on trading in your current vehicle, paying no money down will likely result in higher monthly payments and higher costs overall. Let’s examine this issue a little more closely.
The Difference between a Down Payment vs. No Down Payment
In general, most people don’t or can’t pay for a car outright. So whether or not you make a down payment, you’ll likely be filling out a car loan application to finance your vehicle purchase. However, you need to remember that you’re not just paying for the vehicle when you buy a car. There are additional costs involved. These can include provincial taxes and registration fees. Additionally, the dealership may charge you documentation and transportation fees.
If you don’t make a down payment, the additional fees will get rolled into the amount you’re financing. So, for example, if you’re buying a $25,000 car with no down payment, you might actually need to finance $28,000 when you take into account all the taxes and fees.
However, the moment you drive your car off the lot, it begins to depreciate in value. Typically, it will depreciate as much as 20% in the first year. Therefore, if you finance $28,000 and the $25,000 car depreciates by $5000, you will then have a car worth $20,000, but you owe $28,000 on it. This means that you’ll owe more than the value of your vehicle, and you’ll be upside down on your loan. This is not a good place to be.
Therefore, by making a 20% down payment, you ensure that you won’t owe more than the car’s value even if you take depreciation into account. Furthermore, making a down payment can also help you to get better loan terms. This is why we recommend putting down a downpayment, even if it’s not 20%.
Why You Should Make Even a Small Down Payment
Ideally, you will want to make a 20% down payment, especially if you don’t have great credit. However, any down payment can help reduce your total loan costs and monthly payments regardless of the size.
Let’s say that you want to buy a car that costs $20,000 with no down payment. If you take a 60-month loan at 5.13% interest, your monthly payments will be $415. However, if you put down a down payment of only $1500, you can reduce your monthly payments to $387.
Nevertheless, sometimes you need a new car unexpectedly, and you don’t have any money saved for a down payment. What happens then? Well, the good news is that you can use your old car as part of your down payment if you have car equity.
Car equity is when the value of your trade-in vehicle is worth more than you owe on it. So, if you’ve paid off the loan of your car completely, and it’s worth $2500, you’ll have $2500 of car equity. Alternatively, if you owe $1500 on your vehicle loan, but the car is worth $4000, you’ll have $2500 worth of car equity.
What Happens If You Have No Money for a Down Payment and No Car Equity?
If you can’t afford a down payment and you don’t have car equity, you can still get a car so long as you have a good credit score.
However, you’ll want to make sure to shop around for a car loan so you can find one with the lowest loan costs. You should contact at least three banks and credit unions to determine what loan terms are available to you. Once you find a reasonable offer, make sure to get preapproved for a loan before heading to the dealership.
Can you buy a car with no down payment? Yes. Is it smart? No. You will end up paying more in monthly payments if you don’t offer a down payment, and you could end up upside down on your loan.