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No Money Down Auto Loans: Get the Facts
Car shoppers both young and old who may not have a huge cash flow might be looking at no money down auto loans to get into their next new or used vehicle. When you are considering this type of auto financing, it’s absolutely important to know the facts about what you’re signing onto in order to avoid getting snowed under by excessive debt in new or used car loans or paying more than you need to.
What’s Included in Financing
Generally, the more of a purchase price you finance, the more you will pay overall. Some lenders like to include all of the auto costs in an auto financing deal. Warranty costs, and even tag and title costs, may be included in your monthly payments. These are items you’re better off paying yourself at the time of sale, unless you want to pay interest on these mundane processing costs.
How Your Credit Will Be Affected
Lenders may not tell you that in a 100% financing deal or no money down auto loan, your credit score will likely go down and stay there for a while, because the lack of a down payment presents a greater credit risk on paper. There are also other liabilities associated with showing a lender that you don’t have a down payment on a vehicle.
Whether Interest Rates Will Change
Some types of auto loans are called fixed rate loans, where buyers can predict what they will pay overall. Others are variable rate auto loans, where the interest rates can change due to fluctuations in the U.S. prime lending rate. Other car loan agreements include interest rates that are designed to change at a particular point. It’s important to read your agreement carefully and point out any possible interest rate changes that could leave you with higher monthly payments down the road.
What No Money Down Means to the Lender
As mentioned above, the lack of a down payment in auto financing shows an inability to pay. Most buyers recognize that providing money down saves them a great deal of money on interest payments. If the customer doesn’t have a down payment, they may want to go with a no money down auto loan. However, if they do have the resources to offer a down payment, and a dealer or other lender talks them into 100% financing, that buyer got taken advantage of by not knowing the facts about their auto loan and its overall cost.
How Interest Rates Compare
What car shoppers should do is look at a no money down auto loan and the interest rates attached to it, in contrast with the same auto loan where they can put two or three thousand dollars down. What you’ll almost always see is that interest rates go down for the financing deal that includes the larger down payment, because the down payment makes the loan less of a risk for a lender. It invests the buyer in the car deal at the outset, shows an ability to save, and ensures that the lender will get more of their money back. It also statistically lessens the chances of default or nonpayment on the loan.
All of the above is part of researching the facts on what you are offered by a dealer or any other lender for financing on your next vehicle.
