Should you put money down on a bad credit car loan?
by Steve Cypher on Monday, June 30th, 2008If you have been shopping around for a bad credit car loan, you’ve read the ads in newspapers and on the internet and you’ve seen the advertisements on television and on billboards. Many of them are saying that you don’t need a down payment for a high risk car loan.
The real story about down payments
Here at Auto Credit Express, we try to cover all the bases when it comes to car finance. We have more than 20 year’s experience in subprime car finance and here is what we know: In most cases a down payment can really help you, but in a few instances, it doesn’t always make financial sense…
When a down payment will help you
When you buy a car, especially with a high risk car loan, a down payment helps in a number of ways:
• It can lower your monthly payment – By putting money down, you will reduce your monthly payment. The more money you put down, the lower the payment will be.
• It can reduce the length of the loan period – By increasing the down payment, you can reduce the length of the loan while keeping the same monthly payment.
• Whichever way you decide to go, either lowering the payment or reducing the term, the down payment reduces the amount of interest that you pay – which is especially critical with higher subprime interest rates.
When a down payment doesn’t make sense
When you lease a car, a down payment doesn’t make any financial sense. Here is why:
The monthly lease payment is based on two components – the money factor (or interest rate) and the vehicle depreciation (the difference between the capitalized cost and the residual value).
The capitalized cost is the price that the leasing company pays for the vehicle. In addition to the negotiated price of the vehicle that you agreed to with the dealer, it usually includes an acquisition fee to cover certain administrative costs incurred by the leasing company (to cover paperwork, credit report fees, etc.).
The residual value is the value that the lease company estimates that the vehicle will be worth at the end of the lease given the total number of miles written into the lease as well as the “normal” wear and tear the vehicle will be subject to during the lease period.
In order to come up with a monthly lease payment, the vehicle depreciation and interest costs (over the lease term) are added up. This figure is then divided by the number of months in the lease to come up with a base monthly payment. If this payment is subject to state tax, then the tax (on a monthly basis) is added to the base payment to come up with the total monthly payment.
What a lease down payment really is
Any money you put down on a lease only reduces the capitalized cost. It does not reduce the interest expense, nor does it reduce the taxes (when you make the down payment, the taxes are backed out before the cap cost is reduced, making the actual reduction in the capitalized cost less than your total down payment).
Since the money that you put down does not reduce interest expenses, all you are doing is pre-paying the lease, not reducing your expenses. Therefore, making a down payment on a lease does not save you money. It only reduces your monthly payment. It would be better to take the down payment and put it in a savings account and earn you interest over the lease term. If you want to reduce your monthly payment, withdraw the difference amount from that savings account every month and apply it to your payment.
Visit us at Auto Credit Express on the web
The same rules apply if you have a regular car loan or a bad credit car loan. If you are buying a car, a down payment helps reduce your expenses. If you are leasing a car, a down payment does not help reduce your expenses.
If you are thinking about a bad credit car loan, visit our web site at www.autocreditexpress.com. Here we explain the bad credit loan process, making it easy to understand. We even have a car loan calculator.
You can also apply online using our loan application in the comfort and privacy of your home or office. Also remember that here at Auto Credit Express, we want to help you get back “on the road” to better credit!
Having bad credit has great repercussions, and it is not only not being able to get a loan, but higher insurance premiums, ability to rent and much more. Interestingly enough everything becomes a catch 22, in order to fix credit you need to get credit, but with bad credit you cant.
Dan from http://gewdir.com the bad credit loan blog
Dan,
You’re right. Bad credit can be a vicious circle. But there are a couple of ways that you can begin to raise your credit score. A secured credit card, with the balance paid off every month, is a good way to start. A bad credit car loan is another way to reestablish your credit. If you finance an inexpensive, reliable car and make payments on-time for, say, 2 years, the next time you could qualify for a lower interest rate. By taking these small steps, you could be on your way to a better credit score.