As long as it’s reliable and cost-effective, a car can be a major commodity. After all, walking, public transit and taxis are not always options, especially when you’re carrying groceries, taking a road trip or trying to get to work. So, if you’d like to add some convenience to your life, a new or slightly used car could be just what you’re looking for.
That said, financing a car can definitely come with expenses, one of the largest being your down payment, which can be hard to save up for.
The Purpose Of A Down Payment
When you finance a car with a loan, a down payment is a specific amount of money that you give your lender upfront to purchase your vehicle, separate from your monthly installments. Although it can be a lot of money to fork over, there are several reasons why you and your lender would benefit from a down payment:
Why Do Dealerships And Lenders Want A Down Payment On A Car
Protection – A down payment gives the loan provider some security, as they are entrusting you with an expensive asset that you haven’t fully paid for and that loses value the more you drive it. Lenders don’t want you to owe more than what the car is worth.
Why Do Borrowers Put Down Payments?
Shorter Debt Term – While longer financing plans come with smaller installments and lower rates, you’ll pay more interest over the life of your loan. That said, a down payment can decrease the length of your loan term, leading to larger installments and higher rates but less interest paid overall.
Ownership Benefits – Since it can reduce the amount of debt you’re left with, financing your car with a down payment and a short term car loan can be more affordable. Plus, your car becomes an asset once you own its title, so you’re allowed to resell it, trade it in, or use it as collateral.
Avoiding Negative Equity – If your financing plan is costing more than your car’s market value, you’ll have negative equity, which makes it harder to resell or trade-in, at least for a fair price. Since most cars lose value as soon as you leave the dealership, a solid down payment can help you avoid this problem.
Better Approval Chances – As mentioned, a down payment offers your lender or auto dealer some protection if you default on your loan. The bigger the down payment you make, the less risky you are as a potential client. As such, you will be more likely to qualify for a larger loan, a lower interest rate and a better term.
Can You Get A No Down Payment Car Loan?
To see the best results, most experts recommend that you make a down payment of at least 10% – 20% of your vehicle’s final price and it can be difficult for some drivers to save up that much cash in time. Thankfully, there are plenty of lenders and dealerships in Canada that can offer you a car loan with zero down payment.
In that case, your financing plan will function the same way as a traditional car loan, only you don’t pay anything upfront and you may end up with a longer repayment term. You can either borrow a lump sum of cash from a lender to purchase your car immediately (and repay them over time) or do in-house financing through a dealership.
The Pros And Cons Of A No Down Payment Car Loan
No upfront costs (all interest and fees are dispersed among your loan payments)
It can cost more to finance (if you have a longer term and larger loan payments)
You can buy the car now, instead of later (no need to save up extra money)
You can end up with negative equity (diminishing the resale value of your car)
Any money you don’t spend can cover other expenses (fuel, insurance, etc.)
Higher interest rates apply (larger loans are more risky for the lender/dealer)
You won’t be risking your own finances by draining your savings
It takes longer to gain positive equity (you must consistently maintain your car’s value with repairs, upkeep, etc.)
Approval is based on your income (higher income = better loan conditions/rates)
It can be harder to qualify for good loan conditions and rates
How Do You Qualify For A No Down Payment Car Loan?
Since you won’t be putting any money down on the car loan, your odds of approval will depend on other personal and financial factors, such as your:
Income – When you apply for a car loan, your income and employment status are two of the primary factors your loan provider will inspect. The best way to get approved for good loan conditions and rates is to have a full-time job for at least a few months before you apply, as well as a healthy bank account balance.
Credit History – When you apply for car financing, your loan provider may check your credit report and credit score. If you’ve handled your previous credit products responsibly, the evidence will show up on your credit history, increase your credit score and make you more eligible for good loan conditions and rates.
Affordability (Loan-to-Value Ratio) – If you’re borrowing from a third-party lender, your requested loan amount will be weighed against your car’s market value. Typically, a good LTV ratio means it will be easier for you to afford your future payments, so you’ll qualify for more favourable loan conditions.
Negative Equity – If the amount you owe on your car loan is more than its value once it leaves the dealership, you’ll have negative equity. Some lenders will have a problem with this.
Security – If your lack of a down payment makes it tough to get approved, you may be able to apply for a secured loan by offering an existing asset (another vehicle, property, etc.) as collateral. If not, a stronger borrower can co-sign your application (they agree to take over your payments if you can’t afford them).
What Do You Need To Apply For A No Down Payment Car Loan?
Since a car loan can involve a significant amount of money being passed around, it’s essential to be prepared for the application process before you take the leap. Although every lender and auto dealer has a different way of approving their clients, there are a few personal and financial documents that almost all of them will check:
Identification – To qualify for most car loans, you must prove that you’re past the age of majority in your province/territory (18 – 19+) and that you’re a Canadian resident. Lenders typically only accept government-issued photo identification, such as your driver’s license, passport, or health insurance card.
Property Related Bill – To further confirm that you’re a Canadian resident, some car loan providers will ask you for a copy of your most recent utility bill or another bill that shows your permanent address. They need to know all the best ways to contact you while your loan payments are ongoing (email address, phone #, etc).
Bank Statements – As proof of your income and an active chequing account, your car loan provider may request your most recent monthly bank statements. Depending on the terms of your payment plan, you might also need an account with direct deposit, as well as a VOID cheque or pre-authorized debit form.
Credit Report – Most car loan providers will inspect your credit prior to approving you. The healthier your credit history and score are, the less risk you present, so you’ll qualify for a better loan. Before you apply, check your report for errors and fraud, then wait for your credit score to be within the good range (660 – 900).
Vehicle Details – Your lender will need to know what type of car you’re trying to buy, so they can confirm its current and future value. Information you’ll have to provide can include the car’s final sales price, make, model, mileage and Vehicle Identification Number (VIN #).
Debts & Liabilities – During the financial inspection, your car loan provider may also ask about your existing debts, such as other unpaid credit products or properties (loans, mortgages, etc.). The fewer outstanding debts and liabilities you have, the easier it will be to get approved for a good loan and interest rate.
Can I Get A No Down Payment Loan With Bad Credit?
If your credit score falls within the bad range (300 – 600), it’s probably because you’ve had debt problems in the past, such as multiple missed payments, a case of a stolen identity, or even bankruptcy. No matter the cause, bad credit can make it much harder to get approved, particularly for a large car loan with no down payment.
There are a few different ways to qualify for a bad credit car loan without having to make a down payment, including but not limited to:
Find an Alternative Lender – While most prime lenders (banks, credit unions, etc.) won’t offer you a car loan with bad credit and no down payment, there are plenty of private companies that have easier approval standards. Be careful, as alternative lenders may charge higher rates for smaller loans.
Find the Right Dealership – There are also many auto dealers who accept clients that have bad credit or weaker finances. Similar to alternative lenders, they usually charge higher rates, only for lower quality vehicles than a top tier dealership would sell. Nonetheless, the auto dealer may be more open to negotiating a fair deal if you have a decent income and/or security to offer.
Have Good Security – You can increase your approval odds and earn better loan conditions by offering your car loan provider security, like a cosigner or collateral.
No Money Down Car Loan FAQS
Can I get pre-approved for a no money down car loan?
Yes, you can get a pre-approved loan for a no money down car loan. A pre-approval can help you better understand whether you qualify and whether you can afford it. Moreover, a pre-approval can be a good negotiation tool. You can use it to try and get a better deal from another lender.
What credit score do I need to get a no money down car loan?
To qualify for a no money down loan, you’ll likely need a good credit score of 700 or above. Since the value of a car depreciates quickly, lenders want a down payment to ensure you don’t owe more than the car is worth. However, if you don’t put a down payment, lenders will look for other ways to protect themselves, including tightening their credit score requirements.
How do I increase my chances of getting a no money down car loan if I have bad credit?
Besides improving your credit score, increasing your income and reducing your debt, you can increase your chances of approval by getting a cosigner.
Find The Best No Down Payment Car Loans In Your Area
While a large down payment can make it easier to get approved for good loan conditions and interest rates, it can put a lot of unnecessary stress on you and your bank account. However, there are plenty of lenders and auto dealers in your area that can offer you a car loan with no down payment and Loans Canada can help you find one.
Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.
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