Having a less than stellar credit score usually means you’re required to have some type of down payment to get into an auto loan. The exact amount you’re going to need depends on many different things, so let’s get to it!
Why Do I Need a Down Payment?
In order to be considered for car financing as a borrower whose creditworthiness is less than perfect, you’re going to need to prove to a lender that you’re willing to invest your own money in a vehicle. This means having some cash on hand so you can get into the car you need.
If you’ve been turned down for financing from your bank or credit union, subprime lending may be an option for you, as it is for many bad credit borrowers. While subprime lenders don’t turn down borrowers based on a poor credit score alone, they usually look at employment and residence stability, and require a down payment of at least $1,000 or 10% of the vehicle’s selling price – sometimes more, sometimes less.
The actual amount needed largely depends on your specific situation, including your income, your credit, your history of paying bills on time, the price of the car, and more.
If you want a more expensive vehicle with a monthly payment above what you’re approved for, a down payment or trade-in reduces the total amount you’re financing, and may lower your monthly payment enough to fit within the lender’s guidelines.
If you want to widen your car options with a subprime auto loan, you can always put down as much cash as you like. You don’t have to stick with the minimum down payment amount – in fact, a larger down payment saves you money during the loan term!
Benefits of Down Payments
Not only does a down payment increase your chances of getting approved, it saves you money overall by cutting back on the interest you pay and lowers your monthly payment. Any borrower who's looking for a car loan benefits from putting cash down.
As a bad credit borrower, you’re probably not going to get approved for the best interest rate offered. Since lenders view poor credit as a higher risk, they charge higher interest rates, on average.
To help lessen the impact of a high interest rate, coming up with a significant down payment can greatly reduce the interest charges. Since almost every auto loan is a simple interest loan, this means you’re charged interest on the remaining loan balance. Each month, your interest charges drop, since the loan balance is less. The lower the loan balance, the lower the interest charges. Simple!
Another benefit to down payments is that you may spend less time with negative equity. Negative equity simply means that you owe more on the vehicle than it’s worth. A bad credit borrower with a higher interest rate has a greater chance of being in this position, since the interest charges are higher at the same time the car is depreciating. The more you put down, the less time you spend with negative equity.
Subprime Lenders and Down Payments
With bad credit auto loans, the process is somewhat different when compared to traditional car loans.
As a bad credit borrower, you first need to find a dealership that works with subprime lenders. You then fill out a credit application, and verify your monthly income with a recent check stub, your address with a utility bill or bank statement, and turn over any other required documents.
The lender checks that information, and computes your debt to income and payment to income ratios based on your regular monthly bills. If you’re approved for a subprime loan, they send a payment call to the dealer. This simply sets the maximum monthly car payment you qualify for with the lender.
Once the payment call is received, you and the special finance manager work together to find a vehicle on the lot that fits your needs and the lender’s payment call. Once a car is chosen, the down payment amount is determined.
You don’t have to use cold, hard cash for a down payment – you can also use a vehicle! Since you’re working through a special finance dealership, you can trade in a car and use its equity to help cover the down payment. Or, you can use a combination of your own money and trade-in equity to meet the down payment requirement – it doesn’t have to be one or other.
To use your vehicle, you need to make sure that it has equity, or value that can be used instead of cash. You can estimate how much your car is worth through online valuation sites, but your dealer is the one that determines the vehicle’s actual cash value. Any equity that the vehicle has can be used as a down payment toward your next car.
If you want to estimate how much of a down payment you’re likely to need to get to a certain monthly payment, you can use our auto loan payment calculator. If you work with a subprime lender, they determine a monthly payment you can afford, but this is a useful tool if you have an idea of how much you’d like to spend.
Get Started With a Subprime Lender
Now that you know you’re going to need a down payment if you’re working with a subprime lender, you can start looking for one!
Here at The Car Connection, we’ve got the connections you need to start car shopping. We know what dealerships have special finance departments that work with subprime lenders, and we want to help match you to one in your area. To begin, simply fill out our free auto loan request form. It’s secure, completely online, and there’s no obligation to buy. Let’s get to work!