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Lenders consider a variety of factors when making decisions regarding auto loan applicants. Among the key assessments include the prospective borrower’s credit, income, and down payment.
Most borrowers with steady incomes will find options for financing a vehicle. This applies regardless of their credit score or down payment.
What Credit Score is Needed to Buy a Car With No Money Down?
Borrowers with poor or fair credit may qualify for car loans without a down payment. But these loans will likely have exorbitant interest rates.
Car loans without a down payment requirement are routinely promoted today. Marketing suggesting that buyers can “just sign and drive” with “zero down” is common.
Borrowers with credit scores of 680 or more will likely find the most appealing loan options. Without a down payment, these consumers should find loans with reasonable interest rates.
Those with scores in the 580 to 669 range may qualify for loans without a down payment. Yet, these consumers will likely encounter higher interest rate loans.
Those with a sub-580 credit score will struggle to qualify for loans without a down payment. The available options typically have sky-high interest rates and a limited vehicle selection.
Car loans are a type of secured loan. Lenders are more willing to assume the risk because the car acts as security in the form of collateral.
If the borrower defaults on the loan, the lender will repossess the car to recoup losses.
What’s the Minimum Credit Score to Buy a Car?
Those who qualify for traditional car loans typically have a credit score of over 600. No standard or official minimum credit score exists to qualify for a car loan.
Usually, in car loans, interest rates will rise as the borrower’s credit score declines. Here, an inverse correlation or negative relationship exists.
In late 2022, roughly 14% of borrowers had scores between 501 and 600, while only 2% had sub-500 scores. Yet, the data involving borrowers with credit scores below 500 might be deceiving.
This occurs because of the “buy here, pay here” car dealers. They provide direct customer financing and usually don’t report to the credit bureaus.
The following table shows the average interest rates that borrowers pay based on their credit scores.
Average Car Loan Interest Rates by Credit Score
|Auto Loan Rate (New Vehicle)
|Auto Loan Rate (Used Vehicle)
|781 – 850
|661 – 780
|601 – 660
|501 – 600
|300 – 500
Source: Business Insider
As the table shows, those with bad credit often find themselves facing interest rates in the 14% to 20% range. Those with loans in this range face affordability concerns with big monthly car payments.
The affordability issue is further exacerbated by the automobile market in the U.S. today. The price of new vehicles has now reached an average exceeding $49,000. This surge in new car pricing has a similar effect on used car prices. (Also check out our Can I Get a Car Loan With a Credit Score of 600? article.)
What is the Average Car Down Payment?
When financing a vehicle, most experts suggest making a 10 to 20% down payment. Yet, individuals should look at their larger financial picture and decide.
With the rising costs of cars in the U.S. market, down payments are increasingly important. With the average new car price of more than $49,000, a 10 to 20% down payment will range from roughly $5,000 to $10,000.
Another continuing trend involves zero-down car loans with longer terms. For example, loans with no down payment and a repayment term of 84 months.
In the long run, having a sizable down payment makes good financial sense. You will pay less interest, lower your monthly payment, and may qualify for a loan with better rates.
Is It Advisable to Get a Loan With No Down Payment?
Borrowers may buy vehicles using car loans without a down payment requirement. Keep in mind the importance of ensuring that you can afford the monthly payments.
Consumers should remain cautious when considering longer auto loans. Auto financing involves depreciation and equity, two important variables that borrowers should understand.
Cars are items that we buy that usually depreciate, meaning they lose value over time. After buying a new car, you should expect the value of the vehicle to decline by approximately 20% in the first year. After five years, the car will often depreciate by 40%.
In auto financing, equity is the difference between the car’s current value car and your remaining loan balance. Borrowers have positive equity when their car’s value exceeds the unpaid loan balance. Negative equity occurs when you owe more on the loan than the value of the car.
Negative equity is often referred to as being “upside down” or “underwater.” Negative equity may occur as a result of many factors, including depreciation.
Cars depreciate at different rates, often based on the year, make, and model of the vehicle. The market value of a certain model of a car may plummet if the engine in the vehicle often malfunctions.
The value of a car driven 22,000 miles each year will decline much faster than one driven only 8,000 miles each year.
Negative equity is a problem that often goes from bad to worse. This might occur when borrowers “roll over” a car loan, which occurs in the following example.
Your current car is old, no longer dependable, and in need of costly repairs. You also still owe $3,500 on your car loan.
You go to an auto dealer who will offer you $500 in trade-in value for the car “as-is.” The auto dealer offers you a loan for a new vehicle with the remaining $3,000 balance rolled into the loan.
In the 4th quarter of 2022, roughly 17% of those who bought a new car had negative equity. During this period, the average borrower with an “upside down” auto loan owed more than $5,000.
How to Borrow Less
There are several ways of reducing the amount that you borrow when financing a vehicle. Saving a substantial amount of money for a down payment is a good option. Those with poor credit might qualify for a loan with more favorable terms with a sizable down payment.
Another way of reducing car loan expenses is improving your credit. There are a host of viable ways to increase credit scores. With a better credit score, you should qualify for financing with a lower interest rate.
Get a current copy of your credit report and review it for any errors that are harming your score. Filing a dispute is a quick way of potentially boosting your credit score.
You might also consider a credit-builder loan, which various financial institutions offer. A credit-builder loan is a form of an installment loan that will help you create a good payment history.
Buying a less expensive vehicle will reduce the amount you must borrow. Edmunds compared the costs between a new compact model SUV and a model that was three years old.
The new model had an average down payment of roughly $3,800 and a loan of $28,900. The used model had approximately a $2,700 down payment and a loan of $19,300.
The average new vehicle interest rate was 3.9% and a $482 monthly payment. The average used vehicle had a higher 7.9% rate and a $356 monthly payment.
Negotiate the Price
You might benefit by negotiating the price. Be prepared with resources that allow you to reference vehicle pricing. Some of the best price and vehicle review guides include Kelley Blue Book and Edmunds.
When buying a car from a dealership, the sales and finance staff will likely offer other options. These often include extended warranties, GAP insurance, VIN etching, and others. Declining these additions is likely your best move.
Trade in Your Current Car
If shopping at a car dealer, consider trading in your car. Depending on the value of the car, it might represent a good down payment.
Be sure to do your homework by checking with current car pricing guides. Consider selling the car to a private party if the trade-in offer is too low. There is often a tendency to accept a low trade-in offer for convenience. Auto dealers are aware of it and might capitalize.
Shop Around for Auto Lenders
When buying a vehicle, you should always shop around for a good price on the car and better loan rates. If planning to buy from a dealer, consider obtaining pre-approval from a bank or credit union. A loan pre-approval will also help you with identifying a realistic budget.
Use the internet to your advantage when comparing car loans. Many online lenders specialize in car loans and some offer loans to those with bad credit. Check with any banks or credit unions that you have an existing relationship with, as they might offer you better options.
Your credit score will likely have a significant impact on your financial situation. This is very evident when financing a vehicle. Some of the best practices include saving for a down payment, shopping around, and taking steps to improve your credit.
- Do Multiple Car Loan Applications Hurt Your Credit?
- How to Get a Car Loan With Bad Credit
- How Much Does Your Credit Score Increase After Paying Off a Car?
- Can I Get a Car Loan With a Credit Score of 500?
- How Long Does a Repo Stay on Your Credit?
- My Car Was Repossessed. What Happens Next?
- How Soon Can I Get My Repossessed Car Back?
Anthony Amodeo is a regular finance writer in both business-to-business and business-to-consumer industries. Particular areas of focus include personal finance, small business, real estate, and more. He is a graduate of Kent State University. His credit scores are top tier.