When you have bad credit, it can feel like it’s impossible to get any sort of financing. So when a deal that seems too good to be true comes along, many people think it’s their lucky day. But think twice before accepting it: Like many other things in life, a deal that’s too good to be true often isn’t a good deal at all.
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The Real Cost of No Money Down
Dealerships and their finance arm can offer any number of incentives to potential customers with bad credit, and one of the most common is “no money down.” It’s exactly what it sounds like; you’re able to drive the car off the lot with no down payment. But “no money down” means you have to pay, and pay a lot more later.
For example, in a typical auto loan financing situation, you’d put up a down payment of eleven to twelve percent of the total cost of the vehicle. Remember, that includes taxes, fees, and various other costs. So, if the total bill is $10,000, a down payment would typically be $1100 to $1200 … not exactly walking around money for a lot of us.
But it’s not all about the money you put upfront. Keep in mind, it’s not just the down payment you have to make room in your budget for.
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Pay And Keep Paying
The reason why is one word: Interest. Say you finance your car for $10,000 at 10% a year for five years. With the down payment, your total starting principal is $8800 to $8900. Over the life of your loan, you’ll pay nearly a thousand dollars more in interest! And the higher the amount you borrow, the more you’ll pay in interest.
It’s worth noting that many dealers will be very clear about this drawback and will encourage you to put down a down payment, not least because it’s cash in the bank for the dealership. But the same is true of many other financing “deals.” No payments for one whole year? Spend that whole year collecting interest on your loan? Zero percent financing? It’s not going to last for the entire life of the loan.
It’s understandable that people love these deals. They seem like money savers and if you don’t have perfect credit, they may feel like the only way you can afford a car. But there are better ways to get on the road.
What To Do Instead
If you want an auto loan with bad credit, start with financing. Shop around between lenders and get a sense of what they’re willing to offer you, and then look closely at the interest rates, the terms, and how much they’re willing to loan you in the first place. From there, you’ll be able to make a better decision both about what financing you get, and what car you can realistically afford.
Buying a car is about thinking ahead as much as it is thinking about what’s in your bank account. Shop around now, or your wallet will regret it later.