Bad Credit Car Loan Down Payments
by Steve Cypher on Thursday, September 3rd, 2009Down payments can usually really help bad credit car loan customers but there is one scenario where it does not make sense.
Down payments and you
Here at Auto Credit Express, we try to cover all the basics when it comes to car finance. One of the most important aspects of a car loan, whether you have good credit or bad, is the down payment. In most cases a down payment can really help you, but in one instance, it doesn’t always make financial sense.
The good down payment
When you buy a car, especially with a bad credit car loan and subprime lending, a down payment can help you in a number of ways:
• It can lower your monthly payment – By putting money down, for a given loan period, the monthly payment will be reduced. The more money you put down, the lower the monthly payment.
• 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.
• By lowering the payment or reducing the term, the down payment reduces the amount of interest that you pay – especially critical with bad credit car loan buyers since the finance charges associated with high interest rate subprime loans can quickly add up.
The bad down payment
Although very few subprime lenders are currently offering leases, it is still a good thing to know that when you lease a car, a down payment doesn’t make financial sense. Here is why:
The monthly lease payment is based on two components – the money factor (the interest rate) and the vehicle depreciation (the drop in value of the vehicle).
The capitalized cost is the price that the leasing company pays for the vehicle (remember, the leasing company owns it, not you). In addition to the negotiated price of the vehicle that you agreed to with the dealer, the capitalized cost usually includes an addition amount called an “acquisition fee” to cover certain administrative costs such as paperwork credit report fees that are incurred by the leasing company at the beginning of the lease.
The residual value is an amount that the leasing 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 is either paid entirely up front or added to the base payment to come up with the total monthly payment.
When you make a down payment on a lease, a portion of the money is applied to the capitalized cost with the rest applied to the vehicle taxes (unless they were paid up front in a lump sum). Either way, you aren’t saving any money.
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. While your monthly payment is reduced, the amount you are paying for the vehicle and for taxes has not changed. 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.
The Bottom Line
The same rules of budget management 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 interest expense. If you are leasing a car, a down payment does nothing to reduce your interest expense.
For more information about bad credit car loans, visit our web site at www.autocreditexpress.com.
Tags: bad credit, bad credit car loan, car loan, down payment, subprime, subprime lenders, subprime lending
