Besides being a very good idea in general, making a car loan down payment is often a must when it comes to getting an auto loan with bad credit. But, who wants to make a down payment on an auto loan? The answer is no one. No one wants to shell out a bunch of money upfront to get a car they need. But you should. And, if you're dealing with poor credit, a car loan down payment is usually a requirement. Here are 10 reasons why you want to reconsider making a down payment on your next vehicle.
1. Down Payments Make Getting Approved Easier
No matter how you slice it, bringing in your own cash upfront is a solid move when you're financing a car. The amount you bring in as a down payment is known as "skin in the game." In many cases, such as bad credit car loans, down payments are required. The more you bring to the table the less you ultimately have to borrow from a lender. It's typically easier to get approved for a more modest loan as a bad credit borrower.
When you have lower credit, it can be more difficult to qualify for an auto loan based on your credit score alone. For this reason, lenders look at your ability, stability, and willingness to take on a car loan.
For auto lenders, a down payment shows that you're willing to invest your own money in your loan. It's been proven that people who put their money down on a big expenditure like a car loan are more likely to pay it off successfully.
2. A Down Payment Lowers Your Monthly Payment
Not only does a down payment mean borrowing and repaying less money overall, but it could mean less money coming out of your pocket month to month. Since a down payment makes your overall loan amount lower, it also lowers your monthly payment amount. There are usually two ways to lower your monthly payment when you're negotiating with a dealer: extend your loan term, or make a larger down payment.
Extending your loan term may sound like a good idea, but it increases the overall amount of your loan. The longer you owe, the more interest charges accrue, which can drive up the total cost. Making a larger down payment, on the other hand, lowers your overall loan amount from the start. This allows you to see the savings in your monthly payment without the consequence of racking up extra interest charges.
3. You Pay Less in Interest Charges
When you borrow less, you repay less. This may sound like a given, but borrowing money isn't free – you're often charged a certain percentage (interest rate), so you could be repaying a little, or a lot, more than you borrow. The better your credit score is, the lower the interest rate you typically qualify for, so if you have poor credit, being prepared with a down payment can save you even more.
If you have a low credit score, you're likely to qualify for an auto loan with a higher interest rate. This means even more money owed in the long run. Interest is the price of borrowing money to get the money you need. Most loans have interest, and the interest rate you qualify for is mainly based on your credit score.
Interest is added daily based on the principal balance of your car loan, so the more you owe the more you pay. When you make a down payment, you're lowering the overall amount that you're borrowing, which means less for interest charges to accrue on.
To save even more money, you can make a larger than required down payment, and make larger than required monthly payments, to pay off your loan that much faster.
4. May Qualify You for Different Loan Term
A different loan term can also impact the amount of money you're spending on loan payments each month. The longer you stretch your loan out, the lower your monthly payments tend to be. If you're a bad credit borrower, stretching your loan term too long means paying more in interest charges.
Since lenders want you to be able to successfully complete your loan in a timely manner, they sometimes cap the loan term you're allowed, or may not offer you a loan term as short as you'd like. Down payments may be a big bargaining chip when it comes to talking about how long your loan term can be.
5. Can Eliminate the Need for a Cosigner
In some cases, bad credit borrowers are required to have a cosigner to qualify for a car loan. A cosigner acts as a backup payer in case you're unable to make your payments. They also lend you their good credit score to help you qualify for financing. Sometimes, if you can't find a cosigner to satisfy this requirement, bringing in a larger down payment decreases enough risk to the lender so that it may be just the ticket to going it alone.
6. Lessens Your Chance of Negative Equity
When you first drive a vehicle off a dealer’s lot, it loses value immediately. This is because cars are depreciating assets. They lose value over time, and it doesn't stop. Typically, new cars lose around 20% of their value in the first year of ownership, while all cars lose around 15% of their value each year.
If you purchase a vehicle without making a significant down payment you could end up owing more on your car than it's worth. This is known as being upside down or having negative equity. This can make it difficult to sell or trade in a vehicle, and start you out on a negative equity cycle if you're not careful.
A down payment of between 10% and 20% is typically recommended to offset depreciation, depending on your situation and the car you're financing. The more more you put down on a car loan, the less of a chance of depreciation overtaking your equity. This is important because if you want to sell your vehicle or get into something else, having equity makes things easier.
To sell a car that you're financing, you need to pay off the entire loan amount. But if you can't get an offer large enough to cover your whole loan balance, you'll have to pay that difference out of pocket.
7. May Open Up More Vehicle Choices
If you bring a significant amount of money in as a down payment but don't opt to borrow less, you may be able to increase the pool of vehicles you can choose from. When you're financing a car with poor credit, you need to qualify for financing first, and then choose a vehicle that fits into your approved monthly payment amount. If your down payment is significant, you can typically choose from cars that cost a little more.
8. Could Qualify You for Special Programs
Another benefit to down payments is that bringing in a certain amount of money can help you to qualify for special financing programs in some cases. Not everyone qualifies for programs and incentives on financing, so it's important that you talk to a dealer about all the fine print, and understand how large of a down payment you need to qualify before you agree to any contract.
9. Cash May Not Be Required
Down Payments may be required in some cases, but they're not just for the sake of the lender. The bottom line is that making a significant down payment on an auto loan can save you money when you need to finance a vehicle, and they may not have to be in cash. You can also use trade-in equity from your current car to help meet a lender's down payment requirement, or add it to the amount you already saved to make an even bigger money-saving difference!
10. May Help Auto Loan Approval Odds
As we mentioned earlier, down payments are typically required for borrowers with less-than-perfect credit. This usually means putting down at least $1,000 or 10% of the vehicle's selling price. However, the more money you can put down, the better your odds of getting a car loan can be.
To increase your chances even further, make sure you're working with the right type of lender for your situation. Not all lenders can work with borrowers who have poor credit, and not all dealerships have lenders that can. At Auto Credit Express, we've got your back! Simply fill out our fast, free, car loan request form to get connected to a dealership in your area that's signed up with lenders to help credit-challenged consumers.
Ready for Your Chance at a Car Loan?
Now that you know how important it can be to make a down payment on your next auto loan, you need to find the right dealership. Not all dealers are signed up with lenders that can work with bad credit circumstances. And, those that are don't typically stand out from the crowd.
You don't have to spend time and money searching for a dealership that can assist you, as we know where they are! Auto Credit Express works with a nationwide network of special finance dealers.