Down payments not only save you money, they can help you get into a better vehicle. When you need a car loan, you're often expected to make a down payment. In fact, if you're a bad credit borrower, a down payment is typically a requirement.
Cash Down Now, Cash Saved Later
As a person with less than perfect credit, you're usually expected to make a down payment of at least $1,000 or 10% of a vehicle's selling price, sometimes whichever is the lower amount. However, the more you put down, the more you can save in the long run.
Confused as to how spending money now saves you money later? The answer is interest.
Interest is the cost of borrowing money. The interest rate you qualify for, usually expressed as an APR or annual percentage rate, is based on a number of factors, the biggest of which is your credit score.
The higher your credit score, the better – or lower – the interest rate on an auto loan generally is. Car loans are usually simple interest loans, which means that interest is charged daily based on the loan balance.
Down Payment Savings
Mainly, down payments save you money on car loans because you're borrowing less. The bigger your down payment, the less you borrow, saving you money over time.
Let's look at an example of how a down payment saves you money later.
Sara is considering a vehicle that costs $10,000 for a loan term of 60 months (five years). Her credit isn't the best, so she doesn't qualify for the lowest interest rate, and gets approved for a 12% interest rate. Without accounting for taxes and fees, here's a look at the total cost of the loan with different down payment amounts:
- $0 down: $13,346
- $1,000 down: $12,012
- $2,500 down: $10,010
As you can see, the more money put down, the more money saved in the long run. Just by furnishing a down payment of $2,500, Sara saves $3,336 in interest charges. After accounting for the down payment, she saves $836 overall in the long run compared to not having a down payment at all!
Making a Down Payment on a Car
If having to save up a significant amount of money is the part of a down payment that's stressing you out – don't fret. A down payment doesn't have to be in cash alone. Down payments can be in cash, trade-in equity, or a combination of both.
If you have a vehicle with equity that you're looking to get rid of, you can trade it in to cover all or part of your down payment. If you still owe on your current car, any money you get for your trade-in is used to repay your lender first, and anything left is yours. If you own your vehicle outright, whatever you get for your current car is yours to keep or use as a down payment.
If you attempt to trade in a vehicle, and find that it's worth less than what you owe, you have negative equity. This means there isn't enough value in your car to cover the loan balance, and you're either going to have to pay the difference before you consider another vehicle loan, or see if a lender might allow you to roll over the negative equity. Be careful rolling over negative equity, though. It costs you more in the end, and eliminates the advantages of a large down payment.
Ready to Save on Your Next Auto Loan?
Now that you know a down payment is a great way to save money on an auto loan, it's time to find a lender that can work with unique credit challenges. Subprime lenders that assist bad credit borrowers only work with special finance dealerships. It's not always easy to tell special finance dealers apart from traditional dealerships, but that's where we can help.
At The Car Connection, we’re teamed up with a nationwide network of special finance dealers that are signed up with subprime lenders. To get the process started today, fill out our quick and easy car loan request form. After you do, we'll get to work connecting you to a dealership in your area!