Consumer Car Buying Advice Blog

In the current economy more is better when it comes to a down payment for a bad credit car loan

Down payments

One of the many issues we touch on with customers here at Auto Credit Express is how much they might need for a down payment. The answer to this question has varied greatly over the past few years

Subprime lending

When regional and then national lenders first began to enter the bad credit car loan lending arena, a sizeable down payment was a “must have” for anyone with bad credit wishing to buy a car. Most lenders required at least $1000 dollars down or 10% of the selling price, whichever was higher. Higher risk lenders required even more – with some requiring up to 20% down.

The market evolves

As competition began to heat up among bad credit auto loan lenders a couple of years ago, you could’ve divided subprime lenders into two basic groups:

The first group, which we’ll call the lower tier lenders, required $1,000 down or 10% - whichever was less. This meant that if the purchase price was $10,000 or more, the required down payment was $1,000. If the selling price was less, the down payment was 10% of the price (although any car selling for less is usually a rarity, since most bad credit lenders don’t like to finance older, higher mileage cars).

The second group of upper tier lenders required no money down at all. If you qualified for a loan from one of these lenders, you weren’t required to put any money down to buy a car.

The market crashes

In the fall of 2008, things began to change. Although bad credit car loan lenders continued to be very careful with their lending practices, the asset-backed securities market faltered. Since this was the market that was largely responsible for funding subprime auto lenders, the source of funds for new loans dried up and, as the economy entered a recession, subprime car loan defaults rose.

To counter this, subprime car lenders began raising interest rates, lowering loan amounts, and raising their credit standards. Programs with no money down began to disappear and lenders began to ask customers for larger down payments.

The new reality

With few bad credit car loan lenders offering zero down programs, it’s usually a good idea to make sure you have at least $1,000 for a down payment. If the vehicle you’re considering is more than $10,000, it wouldn’t hurt to allocate more than $1,000 for a down payment.

The bottom line

Even if you qualify for a zero down loan, it’s important to remember that a down payment will help reduce your monthly payment as well as cut down on interest expenses. Also keep in mind 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, Auto Credit Express has developed a number of car loan calculators so that you can see how a car payment with fit into your budget. You can calculate your monthly payment as well as determine how much you can save by increasing the amount you pay to the bank each month. For more information, visit our web site at www.autocreditexpress.com.

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