You typically can't avoid a down payment requirement when you have bad credit. Subprime lenders almost always require you to make one in order to approve you for financing. The good news is that you usually don't have to put down a substantial amount, but it helps to have as large of a down payment as possible.
The Larger the Down Payment, the Better
Generally speaking, subprime lenders ask for a minimum down payment of around $1,000 or 10 percent of the vehicle’s selling price, whichever is less. You can put money down in three different ways:
- Use cash – You can simply make the down payment in cash if you don’t have a trade-in or don’t want to sell your current car.
- Use trade-in equity – If your current vehicle is paid off or has a cash value that’s more than the loan balance, you can apply that equity toward the down payment requirement.
- Use both – If you have a trade-in with equity, and it’s either not enough to cover the required down payment or you want to put more down, you can add cash to the equity in your trade-in.
How Does a Larger Down Payment Help?
It may feel like a waste of money at first, but a down payment actually helps you save money in the long run. When you put more money down, your monthly payment decreases along with your total interest charges. Not quite convinced? Let’s check out an example:
Diane is ready to finance a $14,500 car for 60 months and she’s been approved at an interest rate of 18 percent. The lender is asking her to make a down payment of at least $1,000, and she has a paid-off trade-in with an actual cash value of $2,200. Without putting money down, the loan (not including tax, title, and license fees) looks like this:
- Monthly payment: $368
- Total interest paid: $7,592
When she includes a down payment, here’s how different amounts affect the loan:
Total Interest Paid
$1,000 (typical minimum)
$2,200 (trade-in amount)
$3,200 (trade-in amount plus typical minimum)
If Diane chooses to only put her trade-in equity down, she still saves $56 on her monthly payment and over $1,100 in total interest charges compared to if she didn’t make one. If she adds $1,000 cash on top of the trade-in, she could save $81 on her monthly payment, and over $1,600 in total interest paid.
The Bottom Line
A down payment helps more than it hurts. It may not feel like it right away, but when you’re making monthly payments and racking up the interest, you’re going to notice how much you truly saved. Keep in mind that once your credit improves, you may be able to refinance your auto loan for a lower interest rate and save even more.
If you’re like Diane and are struggling with bad credit but need a vehicle, you’re not alone. There are many credit-challenged consumers that need financing, but we can help get them connected to local dealerships that can help.
At The Car Connection, we work with dealers all across the country that are ready to help bad credit car buyers get financed. Fill out our auto loan request form, and we'll work to connect you to a dealership near you. Our service is free, easy, and comes with no obligations, so you can get started with confidence today!