Consumer Car Buying Advice Blog

As the bad credit car loan environment continues to change one of the biggest questions that many applicants ask is how much of a down payment they will need in order to buy a car.

Revisiting down payment requirements for bad credit car loans

At Auto Credit Express we usually look at the issue of down payments about once a year, but since the beginning of the current recession, we’ve had to visit the issue at least twice a year, due to changes in the bad credit car loan lending landscape. In 2008 we wrote about down payments in January as well as in July, and in 2009 we wrote about this topic in September. But the lending environment has changed since that time, so now is a good time to take another look at what lenders will require before you fill out our online bad credit car loan application.

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

Since these lenders were fairly 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 market changes

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 required down payments. For the better customers, this usually meant 5% of the selling price or $500. For riskier customers, the down payment requirement jumped to 10% or $1,000. For either one of these loans, the down payment was capped at either the $500 figure or $1,000, depending on the program. This meant that if the car had a selling price of $11,000, you would either have had 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 would 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 was the upper tier. Most of these lenders had programs that required no money down. If you qualified for one of these programs, you could’ve bought a car with no money out of pocket.

The market turns

Back in January of 2008, many of the subprime car lenders began to tighten up their lending requirements in response to the slowing economy and the increasing difficulty of getting enough funds for car loans. In the fall of 2008, these changes began to accelerate. 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, bad credit car loan 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 cash down payments.

It’s a new year

First the good news: most bad credit car loan lenders are ramping up their loan originations and for many lenders this signifies a restoration to the same number of loans they were making two years ago. This is also an indication that more credit-challenged consumers will have the opportunity to get an approval for a car loan.

Now the bad news: Due to the recession, there are fewer bad credit lenders now than there were in 2008. In addition, and also due to the recession, there are more bad credit customers out there than ever before. With more customers vying for fewer loans (due to the small lender base), lenders can be more selective about who they will approve.

For all intents and purposes, there no longer are any zero down bad credit car loans. As a rule of thumb, credit-challenged consumers will need to come up with at least $1,000 in cash or trade equity as a down payment.

The Bottom Line

Because of the current lending conditions, once you fill out our bad credit car loan application you should be prepared to come up with a down payment of at least $1,000 for a bad credit car loan. The good news is that this down payment will lower your monthly payment and actually reduce the amount interest that you will end up paying the lender.

At Auto Credit Express we have helped literally thousands of people with bad, blemished, bruised and tarnished credit buy cars, reestablish their credit and raise their credit scores at the same time. Our nationwide network of affiliate dealers specializes in bad credit car loans. The resources section of our web site will help you determine how much car you can afford and unlike other sites, our toll free number is listed on every page in case you have any additional questions. When you decide to buy a car, our online bad credit loan application can be filled out in the comfort and security of your own home.

For more information, visit www.autocreditexpress.com to see what we can do for you.

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