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How To Buy a Car With No Down Payment

7 minute read

By Devon Taylor

Buying a new car is an exciting experience. Yet, for many people, it’s also stressful. Between vehicle research and price comparisons, you’ll have enough to worry about. Factor in vehicle financing and you’ve got quite a hefty task on your hands.

Standard payment plans typically prompt the buyer to offer a down payment and finance the balance of the purchase price. However, down payments are a problem for some people as they usually total thousands of dollars. Some buyers simply don’t have the money. Others could come up with it, but risk leaving themselves financially hamstrung in the meantime. As an alternative, consider these four ways to buy a car with no down payment.

Save Enough to Pay in Cash

The most direct way to avoid ponying up a down payment is to buy the vehicle outright. You’ll avoid the need to make a down payment since the car’s entire cost is covered up front. This isn’t the fastest solution: most people will need at least 1-2 years to follow this plan. However, it offers major advantages: you’ll avoid taking on debt since you don’t need to finance your vehicle. This could save you hundreds or thousands of dollars in interest charges and other costs.

The good news is there are proven strategies to help speed things along. Consider these paths to accelerate your savings:

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Create a Budget

Ask any personal finance expert how to save money and most will start their responses the same way: start by creating a budget. You need to keep close tabs on how much money you have coming in and going out. More importantly, you’ve also got to account for every dollar you spend. This helps build the financial discipline necessary to reach savings goals.

Apply the 50/30/20 rule. Commit 50% of your after-tax income to essentials like housing, food, and transportation. Allow 30% for discretionary spending and save the other 20%. You can also take advantage of the many free software tools available to budget-builders.

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Cut Unnecessary Expenses

Depending on your lifestyle and income, you might want to be more aggressive with cutting your discretionary spending. Reducing your discretionary budget allows you to commit more of your income to savings. This will get you to the finish line faster.

When seeking unnecessary expenses to cut, there are several places to look. Eating out is a big one: it’s much cheaper to cook at home. Make meals in bulk and freeze or refrigerate leftovers. Trim your grocery bill by purchasing off-brand products and eliminating junk food. You can also review your monthly subscriptions and entertainment spending to find additional ways to save.

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Start a Savings Fund

Many retail banks offer specialized savings accounts to customers seeking to squirrel their money away. Customers can set up savings programs that automatically divert a set portion of their paychecks to savings. You can configure these savings as a percentage of your paycheck or as a fixed dollar figure.

Financial institutions also offer an enriched set of data-based tools to help customers reach their savings goals faster. You can use these tools to set goals and create practical plans for meeting them. High-interest savings accounts can also accelerate your efforts by paying you a handsome annual percentage on your saved money.

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Extract Value from Your Current Vehicle

The prices of both new and used cars have been rising as inflation has impacted the U.S. economy. Yet, there’s a secret weapon you can use to overcome a bit of that sticker shock. Spoiler alert: it’s sitting in your driveway right now.

Rising used car prices mean your current vehicle is worth more than you might think. Selling it or trading it in can help you bridge the gap between your savings and your new car’s cost. If you’re able to go carless for a while, it might make sense to pull the trigger sooner rather than later. Some experts believe car values will come down as supply chain crunches ease.

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Consider a Side Hustle

There’s an old adage in the personal finance world. It states that people looking for more financial flexibility have only two options. First, you can cut your spending. Second, you can increase your income. However, there’s only so much spending you can eliminate. Living costs money, and at a certain point you can’t get blood from a proverbial stone. That leaves increasing your income as the only other option.

To that end, consider a side hustle. Rent out a spare room. Drive for a rideshare provider or make deliveries. Start a wholesaling or dropshipping business. Become a virtual assistant. The possibilities are endless, and all you need to get started is spare time.

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Boost Your Credit Score

For some people, saving up the full cost of the car they want to buy simply isn’t an option. Saving thousands of dollars can take years. If your current vehicle won’t last until you reach the finish line, you’ll need to look at other options.

Car loans represent the major alternative. It’s true that many economists expect interest rates to rise in the near-term future. However, many also believe that the age of low-cost borrowing will stick around a while. Yet, getting the best possible terms on a car loan depends on having good credit. Here are two important tips for improving your score:

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Pay Down Your Existing Debts

Your credit score will improve in lockstep with reductions in your debt-to-credit ratio. This metric describes the amount of debt you have as a percentage of the total revolving credit to which you have access. For example, consider a person whose credit cards have a combined credit limit of $10,000. If that person’s credit card balances total $4,000, they have a debt-to-credit ratio of 40%.

Improving your ratio requires that you take a meaningful bite out of your monthly balances. Commit as much of your income as you can to paying down your credit accounts. Make scheduled payments consistently and on time, and your score will improve.

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Be Credit-Score Smart

Consumers can take action to improve their credit scores in many other ways. First, request copies of your credit file. Each of the three major credit bureaus is required by U.S. law to furnish you with one free copy per year. Review your file in detail and dispute any inaccuracies you find.

Next, avoid amassing more credit card and loan debt to the greatest possible extent. Eliminate unnecessary credit spending, but don’t close any of your existing credit accounts. When you close an account, your score goes down. The same thing happens when a lender pulls your credit file. Thus, you’ll also want to avoid applying for new cards and loans.

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Consider a Cosigner

Like saving money, improving your credit score can take a while. Consider a loan cosigner if you don’t have the time to rebuild your credit.

A loan cosigner is an individual who agrees to share responsibility for your loan if you default on your payments. An ideal cosigner is someone with a strong borrowing profile including a good credit score and a low debt-to-credit ratio. For many people – particularly young people – their parents come to mind. You can also ask your spouse, romantic partner, or siblings. Just remember that your cosigner is putting their own credit at risk by helping you out. Handle the situation accordingly.

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Obtain a No-Money-Down Auto Loan

Many financial institutions offer specialized loans usually known as no-money-down auto loans. You can find these loans at regular banks and credit unions, and through online lenders.

The defining feature of a no-money-down auto loan is that it finances your new car’s entire purchase price. By contrast, regular auto loans only finance the balance that remains after you’ve made a down payment. No-money-down loans are generally available to borrowers with high credit scores at terms that compare favorably to standard loans. However, some lenders offer no-money-down borrowing programs to car buyers with less-than-perfect credit. These carry higher interest rates, but deliver the same up-front relief from down payments.

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Pros and Cons of No-Money-Down Auto Loans

No-money-down auto loans carry their own unique set of advantages and drawbacks. On the plus side, they liberate you from the need to plunk down thousands of dollars up front. If you’ve saved some money, you can commit it to other purposes or earn an investment return on it elsewhere.

On the down side, these loans increase your costs as interest accrues on the vehicle’s entire purchase price. In some cases, vehicle depreciation can result in you paying more than the vehicle is worth. No-money-down loans also make it harder to build equity in the vehicle. However, if you’re looking for relief from down payments, these trade-offs may be worth it to you in the long run.

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Devon Taylor

Managing Editor

Devon is an experienced writer and a father of three young children. He's simultaneously trying to build college funds and plan for an eventual retirement. He's been in online publishing since 2013 and has a degree from the University of Guelph. In his free time, he loves fanatically following the Blue Jays and Toronto FC, running, camping with his family, and playing video games.

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