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Buy a Car with No Money Down

You can see it advertised almost every weekend: “Buy a New Car with No Money Down.”  But when taking a closer look, it may not be the best way to finance your next vehicle.

Buy a Car wiht No Money DownWhether you are financing or leasing your next car, often you are given the opportunity to enter into the agreement without any cash out of your pocket.  The main factor that makes this possible is the value of the car.  If you are financing an amount on a car that is within the bank’s lending perimeters you will not need a down payment.  For example, Audi’s primary lending source is VW Credit and with good credit they will loan 120% of a new Audi’s MSRP.  This means if you negotiate a great deal the loan amount will be less than or equal to VW Credit’s requirements.

Leasing will work much in the same way except the dealer will have to include some up-front costs.  Normally when you lease a car you will be required make your first payment and security deposit at the beginning of the agreement.   The car dealer can bypass these requirements by increasing the price (cap cost) by the exact amount that would be required and then include it in the amount financed.

It is important to mention, that you must have excellent credit to qualify for “no money down “loan or lease.  Even if the loan amount is within the bank’s lending guidelines the credit buyer may require a down payment.  Without great credit the loan officer may insist on some upfront cash to show that the customer has some personal stake in the loan.

Even with good credit there are some pitfalls to buying a car with no money down.  The most common is when the car dealer finances the down payment through a different lender.  This secondary financing source is called a “Mouse House” by car dealers.    This occurs when the primary lender approves the loan requiring a down payment. Then the dealer secures another loan to supply the customer with the money needed for the down payment.  This is normally not allowed by primary lender, not to mention these “mouse-house’s” often charge very high interest rates.

The other thing to consider when buying a car with no money down, is how long you intend keep your car.   Even if you negotiate a great price you will be financing a large amount on a depreciating asset.  This means you will have make several years of payments before you are in a good equity position allowing you to trade or sell the car.

If you keep your cars for a while and you have good credit, buying your next car without any cash out of your pocket may make sense.  Just beware of the “mouse-house” and, as always, research the dealer’s “buy-rate” before you sign the loan or lease agreement.


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