Exactly how much of a down payment you need on a car when you have bad credit depends on how bad your credit is and your lender. Lenders who work with bad credit car buyers typically ask for $1,000 down, or a down payment that's equal to 10 percent of the vehicle's selling price, whichever is less.
Why Put Money Down?
Placing a down payment on an auto loan shows the lender that you're committed to completing it, and you're willing to put your own cash on the line to prove it. A down payment can be made in cash, trade-in equity, or a combination of both – funds can't be from another loan.
Another reason you should consider using a down payment on a car loan is that it saves you money over the loan term. The more money you put down, the less you have to borrow. Having less money to pay back means there's less to charge interest on, which means you end up paying fewer interest charges over the life of your loan.
The Down Payment Requirement with Bad Credit
When you have bad credit, your best chance at getting an auto loan comes from a subprime lender. Subprime lenders look beyond credit to approve you for financing based on other factors such as income, employment, and residency. However, to offset some of the risk of loaning to people with spotty credit, these lenders also typically require a down payment.
A general rule of thumb to remember is: the lower your credit, the more likely a lender is to ask for a down payment. The amount they ask for varies depending on the lender and their loan programs, but the industry standard is the aforementioned $1,000 or 10 percent, whichever is lower.
Alternative Options to Consider
If saving for a down payment seems like an impossible task, there are other options you can explore to help offset this qualification:
- Get a cosigner – A cosigner is someone, typically a close friend or family member, with good credit, who agrees to sign a loan with you. By doing this, they're allowing you to "borrow" their good credit and agreeing to make payments if you can't or don't. Because their credit is tied to your loan, any effects – good and bad – that happen to your credit happens to theirs, as well. In some cases, lenders may even require you to have a cosigner if your credit is very low, or you have little or no credit history. For this reason, it's a good idea to have someone available that's prepared to take on this responsibility before you head to a dealership.
- Try a buy here pay here dealer – A buy here pay here (BHPH) dealership is a dealer who's also a lender. These dealerships don't rely on outside lenders to check your credit in order to get you financed. In fact, most of these dealers don't check your credit at all. Generally, they're more concerned that you have enough income to make a payment. At a BHPH lot, a down payment is typically always required, but it could be smaller than what another lender is asking for. With in-house financing, you can usually sign and drive in the same day if you bring enough of a down payment. Keep in mind you aren't going to find new vehicles at a BHPH lot – they tend to be older model used cars.
If none of these options work right now, take a step back and evaluate your credit situation while you're saving money for a down payment. Sometimes, a small improvement goes a long way. Start slowly – just paying your monthly bills on time is a great first step toward raising your credit.
If You're Ready for a Car Loan
If you've already been saving and are ready to finance a vehicle, but don't know where to start, look no further. Here at The Car Connection, we want to help you find a local special finance dealership that has the right lenders for your situation – good credit, bad credit, no credit, and even bankruptcy or repossession.
We work with a network of dealers all across the country that want to help you get the car you need. The process is easy, free, and puts you under no obligation. Fill out our online auto loan request form to get started now!