What To Know About Zero-Down Bad-Credit Car Loans
- Zero-down car loans do exist, but they often come with higher interest rates and longer terms than other types of loans.
- If you have poor credit, you’re more likely to face a higher annual percentage rate (APR) on your loan and fewer options, especially without a down payment.
- If you finance the full purchase price of your vehicle by putting no cash down, you’re at a greater risk of owing more on your car than it is worth.
- Shopping around, comparing offers and getting a preapproved car loan can help you get the best loan for someone with your credit score and financial situation.
Can you really get a zero-down car loan with bad credit?
While it’s easier to buy a car with good credit, it is possible to get a zero-down car loan with bad credit. Some lenders and dealer networks offer zero-down financing to borrowers with weaker credit profiles, but availability varies widely by lender and by the borrower’s overall financial picture. Borrowers may need to shop across multiple lenders to find a zero-down option.
That’s because a loan in which you finance 100% of the value of your car is risky for lenders. With a loan-to-value (LTV) ratio that high, you have little-to-no equity in the vehicle, increasing the lender’s potential loss if you default on the loan.
- “Zero-down” means you finance the entire purchase using borrowed funds instead of putting down any money upfront. You’ll still owe taxes, fees and interest on the amount that you borrow.
- For auto lenders, “bad credit” generally refers to FICO credit scores below 580. Definitions and thresholds vary by lender and by which scoring model they use.
How to qualify for a zero-down car loan with bad credit
To qualify for a zero-down car loan with bad credit, you may want to improve your credit, consider a cosigner and ensure that you can make the payments on time based on your income.
For borrowers with weaker credit, lenders typically look beyond credit score and evaluate risk factors such as LTV ratio, affordability and the ability to consistently make payments.
- Credit score range: Borrowers with poor credit scores (300 to 579) generally face higher rates and less favorable loan options, if they are offered a loan at all. The best loan terms are reserved for borrowers with upper-tier credit. Scores of 580 to 669 are considered “fair credit” while scores above that are considered good, very good or exceptional.
- Income and job stability: Lenders may require more documentation and may scrutinize applications more closely when credit is weak. One way to help combat a weak credit score is to have strong, consistent earnings shown via pay stubs or tax returns.
- Debt-to-income ratio (DTI) and budget fit: Specific DTI ratio requirements vary by lender, with some allowing weaker ratios than others. But when choosing your loan, it’s best to look at the total cost of the loan rather than just the monthly payment. Extended terms can reduce the monthly payment but significantly increase the total cost of the loan.
Explore preapproval and LendingTree’s auto loan calculator before walking into the dealership. If your credit is the main constraint, start with resources designed specifically to help those in need of bad credit auto loans.
What’s the catch? The costs of zero-down bad-credit loans
Zero-down financing means you won’t need to provide cash upfront, but it can increase the overall risk and cost of the loan.
Higher APRs
Your credit score is a major driver of auto loan interest rates, and lower scores generally correlate with higher APRs. That means borrowers with bad credit often pay more in interest than borrowers with stronger credit, all else equal.
Starting out upside down on your loan
A key risk of financing with a zero-down loan is negative equity, or owing more on the loan than the car is worth. Because vehicles depreciate over time, negative equity can occur when depreciation outpaces how quickly you pay down the loan balance.
Starting out with negative equity can limit a borrower’s flexibility if financial conditions change, making it harder to sell, refinance or trade in a vehicle. A recent LendingTree study found that delinquency rates have risen to 5.1%, highlighting the importance of affordability and realistic loan terms.
More debt overall
Increasing your down payment reduces the amount you need to borrow, which can reduce the interest you pay over the life of a loan.
But with a zero-down loan, you’re increasing the amount that you borrow and raising the total interest cost over time. Longer loan terms can lower the required payments but increase total interest paid and increase negative equity risk.
When a zero-down bad-credit car loan makes sense — and when it doesn’t
A zero-down loan comes with risks, but it can be a reasonable option in certain scenarios.
When it can make sense
A zero-down bad-credit car loan may be reasonable if:
- You have sufficient income to cover a loan payment and need transportation quickly, but don’t have cash available for a down payment.
- You’re buying a modestly priced vehicle and keeping the loan amount as low as possible.
- You expect your credit to improve and plan to refinance if you can qualify for better terms in the future.
- You’re comparing multiple offers rather than taking the first option presented.
A recent LendingTree study found that consumers who compared multiple auto loan offers saved an average of $2,346 over the life of their loan.
When it usually doesn’t make sense
A zero-down loan is often a poor choice if:
- The APR is extremely high or the loan terms are unusually severe.
- The deal relies on a long loan term to make the payment appear affordable.
- You expect to trade in or sell the vehicle within a short period.
- The “zero down” offer is tied to high-risk structures like certain in-house financing models, which can carry high APRs.
If you’re in one of these buckets, improving your terms — perhaps by saving a small down payment or adding a qualified cosigner — can reduce risk and cost.
Frequently asked questions
A car repossession is a derogatory mark on your credit history that indicates you may be a high risk to lenders. This doesn’t mean that it’s impossible to get a zero-down loan, but you may need to shop more and compare multiple offers to avoid very expensive terms.
A zero-down loan doesn’t automatically hurt credit, but missing payments most certainly will. If you can’t manage to make the payments on your loan consistently, you may want to consider other options, as your loan repayment history is a part of your long-term credit profile.
Yes, refinancing your car loan is a common strategy to lower costs if your credit improves or if market conditions allow, and a LendingTree study shows that Americans who refinance their auto loan save an average of $1,346 over the life of the loan.
It’s possible to refinance a car loan with bad credit, but terms vary by lender. If you can’t get a lower rate, changing the loan term can lower the monthly payment — but keep in mind that longer terms can increase the overall cost and the risk of negative equity.
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