You're typically required to make a down payment on a bad credit auto loan. However, a down payment is there to help you out, and you save on the overall cost of the loan by making one. How much money you should put down on a bad credit car loan depends on what the lender's down payment requirement is and what you have available to you.
Down Payment Requirements
As we mentioned, a down payment is almost always required when taking out a bad credit auto loan. It can be difficult to come up with one, but you save money in the long run by reducing the interest charges and you lower your monthly payment.
Because you’re dealing with poor credit, your financing options are usually limited to working with a subprime lender or a buy here pay here dealer. Subprime lenders generally ask for a minimum down payment of $1,000 or 10% of the vehicle’s selling price, whichever is less. Buy here pay here dealerships, on the other hand, base their requirement on the cost of the car you choose.
To come up with the required down payment, you can use cash, trade-in equity, or a combination of both. If you have poor credit, you should aim to make the biggest down payment you comfortably can. The more you put down, the more you’re able to save in the long run.
When it Doesn’t Make Sense to Make a Large Down Payment
A larger down payment means borrowing less money, which in turn leads to lower interest charges in the long run. Another reason a big down payment can be beneficial is because it can help close the cost gap between what you owe on the loan and how much the car is worth.
It’s true that the larger the down payment you make, the more money you save, but there are some cases where a large down payment simply doesn’t make sense. Three instances include:
- The vehicle you chose is reliable – Manufacturers such as Toyota and Honda are known for producing some of the most reliable cars on the market. If you choose a model that's known for being safe and reliable, you may not want to make a large down payment, since it may hold its value better than other models.
- You purchased GAP insurance – If you decide you want GAP insurance for your vehicle, making a large down payment isn’t needed. GAP insurance covers the difference between the loan balance and the car’s actual cash value in the event that it’s totaled or stolen; if you didn’t purchase GAP, a larger down payment would be the alternative to covering this difference.
- If it means tapping into other funds – This is a big one. If making a larger down payment means tapping into other funds and savings, it's not worth it. You should always have some money set aside for emergencies.
The Bottom Line
As long as you make the minimum down payment required for an auto loan, you’re usually in good shape. You can make a larger down payment if you want and are able to, but make sure it makes the most sense for your situation.
If you’re ready to get started on your car buying journey but don’t know where to find a dealer that can work with you, we want to help. The Car Connection assists people with bad credit by matching them to dealerships near them that have the lending resources they need. To get connected to a local dealer, simply fill out our easy and free auto loan request form, and we’ll get right to work for you.
That’s not all we can do, though. With our new and used car sections, you can check out vehicles for sale in your area and compare different models.