If you’re a Houston car buyer and you must buy a used car but you lack the down payment, you may ask,
“Can I get a used car with no down payment?”
This is a tough situation, but there’s hope. This post reviews the pros and cons of putting a down payment on a used car.
Make a small down payment
Even if you don’t have the recommended 20 percent used car down payment, you may find a dealer who will take 10 percent or even less.
Tell the dealer if you’re able to put down anything on a used car. The used car down payment will lower your monthly payments.
As you might assume, a zero down payment used car loan will cost more each month because of the higher APR interest rates.
Wait a few months
Save a modest used car down payment over a few months’ time. Pay all other bills on time.
Request copies of your credit reports from the three major credit reporting agencies - Experian, Equifax and TransUnion - and dispute any errors on your reports.
Your cleaner credit reports should lower your potential used car loan interest rate as well as your monthly car loan payment.
Do your homework
Negotiate with the used car dealer. If you like a car and you’ve got a deal in mind, the dealer can’t respond if you don’t suggest it:
- Discuss the car price and financing options with the dealer. Explain your circumstances.
- Take the time to research before you buy a used car. Use online tools to prepare you, such as car loan calculators, income calculators, and payment calculators.
- Familiarize yourself with the lending rates available.
Considerations about making a used car down payment
As you’re researching the market for used cars in greater Houston, you may ask if it’s worthwhile to make a used car down payment. The answer is yes.
You’re probably going to find zero down payment offers, but ask yourself. Is it best to put your money in an interest-bearing account when savings rates are low or is it better to make higher monthly used car loan payments? Is it best to put some money down to score a manageable monthly payment on your used car?
Let’s review the factors to determine what makes the best financial sense for you.
The benefits of making a used car down payment include:
- The bigger your used car down payment, the lower your monthly auto loan payment.
- A larger down payment may prompt the dealer to offer a better interest rate.
- A large used down payment builds equity faster and protects the lender/buyer from potential loss and/or vehicle depreciation.
Consider depreciation:
- A new car depreciates 20 – 25 percent in market value in the first year of ownership.
- A used car typically depreciates less than a new car.
- If you make a zero down payment, and then finance sales tax, registration costs, and other incidents, you may owe more than the vehicle’s worth.
- If you make a greater down payment, you offset the extras, the used car loan remains above water, and you’ve got equity in the vehicle.
Equity in a used car
Having some equity in your used car provides financial breathing room and greater flexibility.
For instance, you decide to buy a zero down payment used car. In just six months, the car is totaled in an accident. Unfortunately, you financed more than the car’s value and haven’t got any equity in the vehicle.
Your insurer might not pay what you owe on the car loan. They will probably pay fair market value for the vehicle.
In this scenario, you will be required to pay the difference between what’s owed and the insurance company settlement. That can be a substantial amount.
Suggested used car down payment
To answer the question, “How much should I put down on a used car?” financial experts recommend at least 20 percent of the car’s value.
According to Edmunds, however, the average buyer puts about 12 percent down. There are several theories about why, but many experts theorize that today’s historically low interest rates are the reason.
In the past, only buyers making a large used car down payment were given the most competitive auto loan rates.
Today, a buyer might want to avoid stretching too thin just to make a bigger down payment. That said, putting down at least 20 percent can make great financial sense over the term of the loan.
Avoid zero down payments
Realize that, for most used car buyers, zero down is just a siren song. You go to the car dealer’s lot and learn that only the best customers with excellent credit qualify for zero down deals.
Even if you’ve got excellent credit, zero down deals come with a high price tag. If you put zero down to purchase a used car, you’ll probably receive a higher interest rate and/or get left “upside-down” – owing more than the market value of the car.
Deciding how large or tiny your used car down payment will be is your decision. Like most financial decisions, it’s important for you to know the deal meshes with your personal finances.
Generally speaking, a 20 percent plus used car down payment is a wise financial decision.
Add a trade-in
A used car down payment needn’t be 100 percent cash. If the dealer accepts a vehicle on trade, the dealer and the vehicle owner agree to deduct the value from the purchase of the new vehicle.
The decision to finance a used car with an auto loan is a smart way to get reliable, safe transportation without the need to save for years. Buyers with 20 percent (in trade and/or cash) typically get the best financing deals.
Do the math
Before shopping for a used car, consider purchase price, trade value, and your used car down payment. It’s then possible to better discuss loan rates with the dealer or to seek auto financing from an external lender.
Get gap insurance
If a used car dealer offers gap insurance, buy it. Gap insurance adds to the cost of the vehicle but may offset the important difference between what’s owed on the used car loan and what the insurance company pays if car is totaled.
Adding a 10 – 20 percent down payment plus gap insurance will help to avoid the risk of becoming upside-down on your used car loan.
Put down the most you can afford
Saving 20 percent for a used car loan may feel difficult, but doing so provides many benefits:
- A larger down payment allows a shorter finance term and helps the buyer to save interest charges.
- Buyers with sub-prime credit (FICO scores of 620 or less) may need to make a larger used car down payment to improve their chances of getting an approved auto loan.
- In general, the larger the buyer’s down payment, the greater the buyer’s chances of getting an auto loan.
Buyers with fair to poor credit should avoid longer-term loans. Although a longer-term loan reduces the buyer’s monthly payment, the loan is much more expensive in the long run.
No credit, no problem!
If you’re ready to apply for in-house financing, Shabana Motors says No Credit, No Problem! We help our customers to get approved regardless of their credit and used car down payment.
