Consumer Car Buying Advice Blog

One of the big questions that many customers ask when they’re looking at bad credit car loans is how much down payment they’ll need to buy a car. We looked at this issue back in January, but the lending environment has changed since then. Now is a good time to take another look at what lenders will require.

A background on down payments

Auto Credit Express has been around since 1999. Although this wasn’t the beginning of subprime car lending, it was very close to it in terms of national lenders coming on the scene. Prior to this time, most bad credit car lenders were smaller companies that evolved from the “tote the note” and “buy here pay here” car lots.

Since these lenders were small, they couldn’t assume as much risk as the larger banks. Down payments were usually 10% of the loan or $1,000, whichever was greater. Many of the higher risk lenders required as much as 20% down.

The bigger banks move in

As the larger banks entered the picture, many of the down payment requirements changed. The banks, themselves, could basically be divided into two groups – the lower tier lenders and the upper tier lenders.

The lower tier lenders all require down payments. For the better customers, those with a better credit history and higher FICO scores, this usually means 5% of the selling price or $500. For riskier customers, the down payment requirements jump to 10% or $1,000. For either one of these loans, the down payment is capped at either the $500 figure or $1,000, depending on the program. This means that if the car has a selling price of $11,000, you would either have to come up with $500 (for upper tier buyers) or $1,000 (for lower tier buyers). Cars selling for less than $10,000 would adhere to the percentage down figure for each program.

In most cases, the percentage figure will not be applicable, since these lenders have maximum model year and mileage requirements for vehicles. Most of the cars that these lenders will finance will retail for over $10,000. The reason for these restrictions is that lenders want you to be driving a reliable car. They know that if a car is running, the customer is more likely to make payments on it.

The second tier of subprime car lenders is the upper tier. Most of these lenders have programs that require no money down. If you qualify for one of these programs, you can buy a car with no money out of pocket.

The economic impact on subprime car loans

Back in January of this year, many of the subprime car lenders were beginning to tighten up their lending requirements in response to the slowing economy and the increasing difficulty of getting enough funds for car loans. Since this spring, a number of subprime lenders have cut back on the number of loans they originate, while a few have pulled out of lending altogether.

The lenders that are still out there are cutting back on their zero down loans and requiring more customers to come up with a down payment. This means that if you might have qualified for a zero down or 5% down program a year ago, you may have to come up with 10% down now.

The Bottom Line

Because of current economic conditions, you should be prepared to come up with a down payment for a bad credit car loan. The good news is that a down payment will lower your monthly payment and actually reduce the interest that you pay the bank.

Remember that in addition to the down payment, you will also need to budget for an initial car insurance payment. To help you with your budget, visit our web site at www.autocreditexpress.com. There you will find car loan calculators so that you can see how a car payment with fit into your budget. Once you’ve made a buying decision, you can fill out our secure online car loan application in the comfort and privacy of your home. As always, at Auto Credit Express, we want you “on the road” to better credit!

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