Why Is a Down Payment Needed with a Bad Credit Auto Loan?

If you have bad credit and need an auto loan, you usually have to make a down payment in order to get approved. The reason why lenders ask for a down payment is so that they know you’re serious about successfully completing the loan, and are willing to invest your own money in it. You may be hesitant about making a large down payment, but putting money down helps you in the long run.

Down Payment Requirements

Why Is a Down Payment Needed with a Bad Credit Auto Loan?Now that you know a down payment is generally required with a bad credit car loan, how much do you need?

The amount needed to put down varies, but if you plan on using a subprime lender, they typically require a minimum of $1,000 or 10% of the vehicle’s selling price, whichever is less. Subprime lenders specialize in helping borrowers with bad credit and work through special finance dealerships.

If you go through a buy here pay here dealer, the down payment requirement is a little trickier. The amount you need to put down generally depends on the car you choose, so the requirement is variable. Don't be surprised if they ask for a higher down payment than subprime lenders.

Coming Up with the Down Payment

You have three options to choose from for coming up with a down payment:

  1. Trade-in equity – If you have a vehicle with equity (meaning it’s paid off or its actual cash value is more than the loan balance), you can trade it in and apply the equity toward the down payment requirement.
  2. Cash – If you don’t have a car to trade in, you can use cash.
  3. Combination – If you have a trade-in and its equity doesn’t meet the minimum required down payment, or you want to make a larger down payment, you can add your own cash to the trade equity.

Although you could make the minimum down payment and be OK, we recommend that you make a larger down payment if you have poor credit and can afford to. Because you’re dealing with bad credit and the higher than average interest rate that comes with it, putting more money down can go a long way toward reducing the interest charges and saving you money in the long run.

Let’s check out an example to see just how different down payment amounts change the interest charges on an auto loan. Shelby wants to finance her next vehicle for 60 months and was approved at an interest rate of 14%. She has a trade-in worth $3,500 and is looking at a car with an out-the-door price of $15,500.

This is what her loan would look like with different down payment amounts:

Down Payment --- Monthly Payment --- Total Interest Paid
--- --- --- --- ---
$1,000 (typical minimum) --- $337 --- $5,743
--- --- --- --- ---
$3,500 (trade-in amount) --- $279 --- $4,753
--- --- --- --- ---
$4,500 (trade-in plus $1,000) --- $256 --- $4,357

The Bottom Line

You generally need a down payment with a bad credit auto loan. However, keep in mind that this requirement is there to get you approved and help you save money in the long run.

When you have your down payment ready and want to take the next steps toward getting a bad credit car loan, we’re here to help. At The Car Connection, we work with a network of dealerships across the country that want to help you get the vehicle 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!


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