Can You Buy a Car With No Down Payment?

December 27th, 2019 by

A man is handing car keys to a customer.

As Americans, many of us don’t just “want,” a vehicle—reliable, safe personal transportation has become a “need.” Many cities offer fantastic public transportation, with bus and train routes expanding all the time. At the same time, factors such as urban sprawl, development, and the transition of many jobs outside expensive city limits have led to the need to travel beyond standard public transportation limits. For many people, this is a problem with a reasonable solution—simply purchase the car, truck, or SUV that will be best for their job needs, their family, and drive to work. But what if you have bad credit?

What about those who are just starting in the job market, who lack both credit and money to just purchase a vehicle? All of the great deals you see on TV or online for vehicles often require a down payment and financing in order to walk away with a vehicle. As a result, many people find themselves stuck without a vehicle to get them to and from work because they lack the front-end financing or stellar credit to qualify for a loan. Are there any solutions? How can drivers with bad credit break out of this cycle? Can you even get a car without a down payment?

The Basics of Financing

First, let’s look at how purchasing a vehicle typically works. When you see ads for those shiny dream cars, they typically list an MSRP. That stands for “Manufacturer Suggested Retail Price.” You may have heard others say, “never pay sticker price on a car.” The MSRP is what they’re referring to as the “sticker price,” so-called because it’s typically printed on the info sheet for the vehicle.

Regardless of what you pay for a car, generally speaking, the amount you spend is going to be more than the cash you have in your pocket. That’s where financing comes into play.

You can choose to finance the vehicle through a financial institution of your choice, or you can check out available financing through the dealership. Some dealerships are able to take a look at your credit and income, and much like an independent financial institution would do, offer to loan you the cost of the vehicle, in exchange for monthly payments.

Monthly payments are broken into two parts: principal and interest. The principal is the amount that you actually owe on the vehicle, while interest is a payment made to the lending source for the cost of lending.

Your credit rating, current income, and down payment will impact the amount of the overall payment. The better your credit rating is, the lower that interest rate tends to be. That’s because the lending source sees you as less of a risk. Many lenders also feel that having a regular income that works out to a certain percentage of the vehicle price will lead to a higher likelihood that you’ll make timely payments in full. Additionally, the larger the down payment you make, the lower the principal, and thus the less you owe overall.

Can you get a loan without a down payment? It is possible. A down payment is typically required to ensure you’re going to pay at least something on the vehicle before it leaves the lot. It’s a promise that, while you aren’t making a full payment today, you are starting the process of paying on that vehicle. Most dealerships require around $1000 or 10% of the selling price; however, this can be in the form of cash, trade-in, or a combination of the two.

That being said, there are plenty of situations in which a prospective car buyer might not be equipped with either that stellar credit rating or a large sum to put down on the vehicle. For young drivers, having no credit works about the same as having bad credit, too—you’ll still be seen as a financial risk because you don’t have that long history of making bill payments on time.

So what can you do in these cases? While bumming rides and using ride-share services for a while can provide a temporary solution, this isn’t an appealing long-term solution for most of us. There are a few options that will allow you to purchase a car, even with bad credit.

Option 1: The Cosigner

Young and new drivers tend to choose the cosigner option, as this buys time while these individuals build up their credit, get started with a new career and establish that steady income, or take care of some dark marks that occurred in the past.

Cosigners simply share the overall responsibility of the car payment and ownership. Adding a cosigner may not lower your overall interest rate, as one person will be primary on the loan. Bear in mind that being or having a cosigner is not a position to be taken lightly, either. Whenever a payment is missed, this impacts the credit not only of the primary but of the cosigner as well.

A couple is signing paperwork for a car that they're buying in Cincinnati, OH, with bad credit.

Option 2: Shop Around

Financing can be done through a variety of institutions. Check around with local credit unions, banks, and auto dealerships. Do the research and look into what current auto loan rates are, based on your location, your income, your credit rating, and any down payment you might be able to scrounge up.

Not only should you check around with brick-and-mortar lending institutions, but check online, as well. Online car loans exist in this day and age, and many have a very simple pre-approval process. Pre-approval does not mean that you are automatically qualified for the loan—you’ll still need to complete the full application when the time of purchase arrives—but this process will let you see what amounts and rates you’ll qualify for.

Option 3: Buy Here, Pay Here

Some car dealerships pride themselves on being able to finance any prospective buyer, and for those with bad credit, this might be the best option.

The Buy Here, Pay Here model is a great option for shoppers who have found themselves in a tight spot but are on the way to improving this situation. Dealerships that provide this option take great care to create an atmosphere in which more prospective buyers are able to drive away as quickly as possible.

First, they offer vehicles at a variety of price points. This means buyers with bad credit have more options for their budgets. Next, they have a “guaranteed financing” process. This may be a separate application or an online application that must be completed before heading to the dealership. Be sure to check out any potential options and their requirements; additional documentation may be necessary, too.

One thing to bear in mind is that interest rates from Buy Here, Pay Here financing might be higher. This is not because these dealerships want to overcharge or make more money from people with bad or no credit. The truth is that these types of loans are considered high risk, and the higher interest rate is in place to accommodate money lost on previous loans.

The good news is that taking out this type of loan and making your payments on time can go a long way towards repairing your credit. The best way to prove that you are in a position to take on future lower interest loans, mortgages, and credit cards, is to make regular payments on your current expenses. Paying off a high-interest rate car loan tells future lenders that you’ve recovered from a bad patch, and you’re ready to take on new financial responsibility.

At McCluskey Automotive, we are proud to offer loans to people building/rebuilding their credit score. We understand that everyone has to start somewhere and that people hit hard times, so we offer in-house financing to improve your credit or get you back to where you need to be. You can find us at one of two locations; the first is at 9024 Colerain Avenue in Cincinnati, our second location is at 8525 Reading Road in Cincinnati.

2021 Update

A closeup shows a turned out pocked of a man with bad credit in front of a red car.

Is it Really Possible to Have No Down Payment?

The idea of buying a car without a down payment might seem like pure fantasy, but it actually is possible. That being said, it’s still something that is relatively rare and usually requires a lot of trust from a car dealership. Think about it this way: buying a car without any sort of down payment means a dealership is letting someone drive away in a vehicle that likely costs $20k or more without paying a single cent. Any business would have to really trust a customer to let them do something like that – so there have to be good reasons for a person to be able to buy a car without a down payment.

That kind of trust will often involve a dealership working with a customer who has an extremely good credit score. After all, your credit score basically lets lenders know how much they should trust you, how reliable you are with loans, and what kind of a risk you present. Well, they can tell the same thing to a car dealership; a high credit score indicates that you’ve paid loans on time and in full in the past, so you are someone they would expect to do so in the future.

Now, that doesn’t mean that everyone with a good credit score can buy any car they want without making a down payment. There are still going to be plenty of times when a down payment is necessary – this can all vary quite a lot from one dealer to another. And there will also be times where special incentives and programs can eliminate the need for a down payment, and customers who might otherwise have to pay one can avoid it. Although this typically still requires a good credit score to qualify for these incentives.

We’ll talk more in a moment about credit scores and how to improve them, but we should mention that avoiding a down payment isn’t necessarily a good thing. Sure, it means you pay less for your vehicle upfront, but you’re still getting financing for that vehicle (it has to be paid for somehow). A down payment reduces how much financing you have to receive, which in turn either lets you pay off a loan faster or pay less in principal and interest over time. So even if an incentive allows you to get a vehicle without the need for a down payment, you still might want to make one in order to reduce the long-term cost of the vehicle.

What is a Credit Score?

We’ve been talking a lot about loans, down payments, interest, and your credit score, so let’s take a moment now to dig a bit more into the idea of a credit score. This is something that can really feel like a mystery or like trying to learn a foreign language, but it’s pretty simple once you break it down. Essentially, your credit score is a way for potential lenders to look at how well you’ve managed to pay your debts in the past and what kind of flexibility you have with your money right now.

It’s a simple rating that eliminates the need for each lender to individually look at your credit history in detail to see what your spending has looked like over the past decade. This is what allows you to get a loan on a vehicle in just a few minutes, rather than hours or even days of waiting for a lender to review your background. Credit bureaus look at a number of different factors – including your past debt payments and how much of your current credit you’re using – and use this information to determine your overall score.

A lender, like a bank or a car dealership with a Buy Here, Pay Here program, then looks at your credit score to decide on whether they should lend you money or not. They typically have score thresholds for offering loans, as well as different scores they require for different amounts of interest. So if you’ve proven that you’re good at handling money and paying off loans, lenders are more likely to lend you money and keep it at a low interest rate since you’re a safe bet.

A man is pushing a dial on a circular credit score diagram from Average to Good credit.

Best Ways to Improve Your Credit Score

Now that we’ve gone over how your credit score works, you might be wondering what you can do to help yourself out if you have bad credit. The good news here is that there are some pretty simple ways to improve your credit score, and a lot of these can start helping you in just a few months. Some of this will take time, but just be patient.

Here are some excellent ways to help fix bad credit:

  • Pay Bills on Time – This is one of the simplest and most important things you can do to build better credit. Pay credit card bills, loan payments, and everything else you owe on time. Late payments will negatively affect your credit score, plus you end up paying more in interest and late fees.
  • Pay Debts if Possible – Whenever possible, pay off a debt in full to get it off your back. The payment means the debt will eventually leave your credit report, and it’s one less expense you have to worry about each month. Some investment experts will suggest not making a big payment and investing your money instead – but this only works with the right strategy and if you’re in a situation where you can do that securely.
  • Keep Credit Cards Low – One of the major factors in determining your credit score is your “credit utilization ratio,” which refers to how much of your total available credit you have used at a given time. If you have $1,000 in credit available, with $600 on your card, then you’re using 60% of your credit. Try to keep your credit utilization ratio at or below 30%. The lower it is, the more flexible you are, and lenders like to see that you’re not over-extended financially.
  • Keep Old Cards Open – It might seem like the right idea to close a credit card account if you’re no longer using it, but this will impact your total available credit, which in turn will impact your credit utilization ratio. Unless you’re paying unnecessary annual fees, it’s a good idea to keep that card open, even if you don’t really use it. This keeps your total available credit higher, and it gives you an emergency card to use just in case.
  • Don’t Apply Too Often – While thinking about total credit, it’s important not to get too many cards or loans all at once. Each time you apply for something like a car loan or credit card, a hard inquiry is made on your credit report. Too many of them in a relatively short time can lower your score because it makes you seem impulsive or unpredictable. You can have numerous similar inquiries without penalty, such as would occur if you’re trying to find a good deal and comparing offers for a car loan, but it needs to be within a short period of time.

Your Credit Score Is Fluid

Remember that most negative things on your credit report will eventually go away. So even if you had a hard time paying off a credit card, once you do pay it, it will disappear from your credit report after seven years. That can seem like a long time, but just keep up the good work, and you’ll have great credit to enjoy in the years ahead.

Posted in Bad Credit