Tips for No Money Down Car Loans

A young couple buying a new car
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Getting a car with no money down is appealing to many car buyers. Let's face it, it is difficult to save up a big chunk of money for a car purchase. Driving off the lot without putting any money down can be invigorating, but it comes with some pitfalls. Get some helpful tips on how to handle the pitfalls of a no money down car loan to make sure your financial future is not in jeopardy.

Increase Your Monthly Payments

You will want to reduce the amount you owe on your car loan as soon as possible when purchasing a vehicle with no down payment.

It is not a good situation to be in when you owe more than what your vehicle is worth. Lower the amount you owe by increasing your monthly payments or applying a large payment at a later date. For instance, you could apply your tax refund or other lump sum when it becomes available.

Purchase Gap Insurance

Gap insurance is going to be an important coverage to purchase through your lender or insurance carrier. Gap coverage will protect you if something were to happen to cause a total loss of your vehicle. Since a typical car insurance policy with full coverage only covers the actual cash value of your vehicle, gap coverage covers the difference between what you owe and what the vehicle is worth. You will need to carry gap coverage as long as you owe more than what the vehicle is worth.

Check Into Loan/Lease Payoff

If you are buying a used vehicle and find yourself owing more than the vehicle is worth, look into loan-lease payoff.

Gap is usually only for new vehicles whereas loan/lease payoff can apply to any vehicle. The coverage essentially is the same as gap insurance, however, there is a cap on how much loan/lease payoff covers. Expect loan/lease coverage to exceed 25% of what your vehicle is worth. Anything beyond 25%, plan on covering out of pocket.

Extra insurance coverage is good, obviously especially if you are in a serious accident. However, it is not going to help you when you want to get rid of your vehicle. Selling a vehicle which you owe more than it is worth is never fun. It can put you in a never ending hole because it is common to refinance your old balance into another vehicle. It is best to not get in this situation from the beginning. Try to come up with at least a small down payment or look into ways to increase your monthly payment.