People who buy new cars without making a down payment can get themselves into financial problems as the value of their vehicles drops. Car shoppers usually consider whether they can afford the monthly payments on an auto loan. However, they also should consider whether the lack of a down payment will leave them owing more on their cars than they're worth.
Costly Deal
It may seem ironic, but no-money-down deals can be the worst car deals for people on tight budgets to make. Consumers' monthly payments are automatically higher when they don't make a down payment on a vehicle. People who make the traditional 20 percent down payment essentially are paying off the immediate decline in value that's expected for most new cars the first year after they're purchased.
The Edmunds auto information website says that a down payment also helps keep buyers from being "upside down" in their loans. People are upside down in a loan when they owe more to their auto lenders than their cars are worth.
Interest Charges
Some people stretch out their loan payments over several years to make a no-money-down car deal affordable. Auto loans are usually in effect for four or five years. However, some lenders will extend auto loans to as long as seven years to give borrowers lower monthly payments, which they can afford. Yet longer loan periods raise the cost of the vehicle because the borrower ends up paying interest charges over seven years instead of four or five years.
Trade-in Value
Consumers who owe more on their vehicles than they're worth because of a previous no-money-down deal can't use the trade-in value for their cars solely as a down payment on a new car. Instead they have to pay off the loan on their old vehicle as well as finance the purchase of the new vehicle.
Rolling the remaining balance on the old loan into a new loan to pay for a new vehicle can be another bad deal that leads to an upside down loan situation. That's because the borrower will be paying more in interest on a larger loan amount and still paying for a vehicle he no longer owns.
Considerations
A Bankrate.com article, "In a Hole With an Upside-Down Auto Loan" recommends that car buyers avoid no-money-down offers and put at least 20 percent down on any vehicle they purchase. Furthermore, the article says consumers should take on the highest monthly payment and shortest financing terms for their vehicles that they can afford. That means car buyers should limit the life of their auto loans to four years or fewer if they can afford to make the monthly payments under the loan terms.
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