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UNDERSTANDING NO DOWN PAYMENT AUTO LOANS

Many lenders today have realized that a huge portion of the borrowing public is strapped for cash—and a no down payment auto loan is an attractive offer to make.

But will it help you?

Car shoppers are always told to put down at least 20% of the purchase price. But the latest analysis of Edmunds on new and used car purchases revealed that buyers make an average of only 12% down payment in 2013.

Why is it low? Is it even enough? Does that mean the ideal 20% down payment is not relevant anymore?

People make a less-than-ideal down payment for at least two reasons:

  • Car prices have substantially increased.

  • Their income is not getting any higher.

In short, they can’t simply afford to put down 20%.

Another explanation is interest rates are generally low, so there’s little incentive for buyers to put more money down. People years back had to make a bigger down payment to get a lower interest rate because rates were relatively high.

The Case of Low or No Down Payment

Cars depreciate. That’s a law, like the law of gravity.

Cars lose value and that’s one of the problems that come with car financing. It is also one reason why lenders want a sure 20% down payment.

New cars generally lose their value by 20 to 25 percent at the first year of ownership. You can always estimate the depreciated value of a car you’re interest to buy by dividing its MSRP into its trade-in price after a year of ownership.

Now, think of paying a low down payment or skipping it at all. You have a rising debt and a declining asset value—a recipe for an upside-down auto loan. This is the situation where you owe more than how much your car would currently sell for.

On the contrary, making the ideal 20% or bigger down payment lowers the monthly payments and finance charges. It also minimizes the risk of ending up underwater in your auto loan.

So How Much Should I Put Down?

If you look at it closely, 20% is the safest you can make for a down payment. But it doesn’t really matter what percentage you will be able to shell out.

As long as you put some money down, you’re good. Actually, it’s the most you can afford to pay, as one expert puts it.

But what if you can’t really afford a down payment? Does going for a no down payment auto loan make sense?

A no down payment auto loan is an easy way to get a car loan. With it you can get into a new car without having to hand the dealer some cash.

But expect to pay higher monthly payments as you have a bigger outstanding balance to pay off. You are also more likely to be upside down on your auto loan, like what was discussed earlier.

So regardless of the lender’s decision and the availability of zero-down loans, experts suggest making a down payment.

Borrowers with bad credit should all the more put more money down, because it increases their chances of getting approved for an auto loan.

Suggestions for Low or No Down Payment

1) SAVE AHEAD OF TIME. If you are planning on buying your own set of wheels soon, save money for the down payment as early as now. This is one of the best things you can do to make car financing easier.

2) USE YOUR TRADE-IN. If you are having hard time gathering cash for the down payment, you can trade your current car in at the dealership and have the value applied to the down payment.

3) PAY MORE EVERY MONTH. If you’ve gotten into a zero-down auto loan already, pay every month to avoid being upside down on your auto loan.

 
   
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