Some younger consumers might be ready to purchase their first car. However, they might not have established credit. When lenders offer financing for a vehicle or other purchase, they pull the individual’s credit scores to understand their credit worthiness and/or risk.
Potential buyers who don’t have any credit history might wonder how this will impact them purchasing a new or used car. What is the average down payment on a car with no credit?
Consumers with no credit could still purchase a vehicle. However, buying a car with no credit could mean that the consumer:
- Uses a co-signer on the loan
- Allocates a higher down payment
What is a Cosigner?
When an individual lacks credit history, a co-signer could enable the individual to secure a loan with better terms. What is a co-signer?
This term refers to an individual who also applies for the loan. LendingTree explains that using a cosigner for a loan could help an individual establish their credit and possibly obtain a better interest rate.
However, there are a few downsides to using a co-signer. This co-signer will be on the hook for late fees or missed payments if the applicant doesn’t abide by the loan terms. LendingTree notes that the co-signer’s credit score could be dinged by missed or late payments.
What Down Payment Amount is Expected with No Credit?
Car buyers with no credit also could be approved for a car loan on their own (without a cosigner). However, when an individual has no credit, Bowman Chevy notes that the individual will“…probably be required to put down 10% or $1,000 dollars (whichever amount is larger).” The dealership also explains that borrowers with no credit should probably brace themselves for higher interest rates.
Borrowers with no credit might save up to ensure that they can allocate the expected down payment. In addition, a higher down payment (more than 10 percent or $1,000) also could help to make monthly payments more manageable.
What about No Money Down Deals?
Some car dealerships might offer deals where the borrower only has to pay a negligent down payment or maybe even no down payment. These deals could seem like a good opportunity for those who don’t have any money saved for a down payment.
Capital One outlines the possible benefits and downsides to ‘no money down’ deals. Capital One explains that these deals allow the car purchase to be less expensive in the short-term; after all, the buyer doesn’t have to allocate $1,000 or more for their down payment. In addition, the company explains that these deals also could help buyers to boost their credit score (if they make their payments on time).
What are the drawbacks? Capital One explains that buyers will pay more interest over the life of the loan and the loan will often have a higher interest rate, too. The car also could be underwater immediately if the loan balance exceeds the actual value of the vehicle (down payments help offset depreciation).
New cars can depreciate anywhere from nine to 11 percent just by driving out of the dealership. While used cars might have been impacted by some depreciation, the down payment still plays a role in perhaps helping to offset the cost of the lowering value.
Saving for a Down Payment
Borrowers with no credit might not need to purchase a car immediately. In this case, they might begin saving up for a down payment for their car.
Again, buyers might need to allocate either $1,000 or 10 percent of the purchase price (whatever figure is greater). Individuals might look at their budget to see how much money they can feasibly save per month for the down payment on the car purchase.
Other Costs Associated with a Car
When buying a new or used car, a down payment isn’t the only cost for which buyers need to prepare. Sales tax for car purchases might need to be paid separately, although the tax also could be rolled into the loan (buyers will need to inquire about this at the dealership).
If the sales tax cannot be rolled into the loan, buyers will need to have the money to pay this tax. Rates will vary per state. In some states, there is no sales tax for the purchase of a vehicle. The states that don’t charge sales tax for car purchases include:
- New Hampshire
Those living in Nevada will pay the highest amount of sales tax. According to Policygenius, the sales tax rate in Nevada is 8.25 percent; Kansas charges 7.50 percent, and California charges 7.25 percent.
With the exception of the five states that charge no sales tax, Policygenius reports that the least expensive states for sales tax (related to the car purchase) are Alabama (2 percent), Colorado (2.9 percent), and North Carolina (3 percent).
In addition to sales tax, buyers also will need to pay to register and title their vehicle. Costs vary per state.
Another Option? Buy the Car without a Loan
Some car buyers don’t want to pursue financing for their car. They might search for a car that’s affordable and that they can purchase with money that they saved for their purchase.
When shopping for used cars, buyers might be able to find models that only cost a few thousand dollars. They might purchase their car without a loan. However, buyers who are interested in buying the car outright (without financing) might need to contact the dealership to find out what forms of payment are accepted.
In addition, when buying used cars that offer a very low price, buyers can ask to review the Carfax to understand the vehicle’s history (including the number of previous owners). To ensure that they know about any issues related to the car, buyers also could request an inspection from a third party.
Low-priced vehicles could have a cheap price tag because of their age, mileage or even their condition. Some buyers, though, could simply want a car that gets them where they need to go; they also might not plan on owning the car for a long period of time.
A Trade-In Could Help, Too
Some individuals without credit might have a car that they own that was a gift from their parents or maybe they purchased it outright. When buying a new car, they might offer up their current vehicle as a trade-in.
Before offering a car as a trade-in at a dealership, car owners can research the vehicle’s value via Kelley Blue Book. The site will ask the owner to enter the VIN or license plate information; owners also could start the valuation process by entering the make/model of their vehicle (and the year).
Owners will need to enter the vehicle’s mileage and select the color and trim of the vehicle. They also will need to select any features in their car.
KBB also will ask about the vehicle’s condition. The site includes several condition options with descriptions about what denotes each condition level. Car owners should be honest about the condition of their vehicle; choosing a better condition will only result in an inflated estimated valuation. Dealerships know the difference between a car in excellent condition and one that is only in good or average condition.
After all the information has been included by the owner, KBB will show an estimated value of the vehicle and a range, too. Car owners can print out this information to have on hand at the dealership. The KBB estimate could come in handy during negotiations.
Some car owners want to get the most money possible for their current vehicle. Selling a car to a dealership as a trade-in means that the dealership has to build in their profit; for this reason, car owners will receive less money when using the car as a trade-in than if they were to sell the car privately.
KBB also lets car owners view the estimated resale value of their vehicle (for a private sale). However, not all car owners are interested in selling their car privately. Those who decide to take on the private sale option, though, can use some of the tips offered by Kelley Blue Book to help ensure a safer (and perhaps less stressful) sale.
Finding the Best Car
Car buyers with no credit might be prepared to make a down payment of $1,000 or more when purchasing a vehicle. However, these buyers also might focus on finding the best car at the best price, too.
The budget might drive the car search. When shopping for a car that fits into the budget, buyers can use tools on many car sites to sort their results by price or even set strict budget parameters. Most car shopping sites make it easy to find the cars that fit the budget; buyers can then look through their options to find the best car for their needs at the right price.