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. If you're dealing with poor credit, a car loan down payment is usually a requirement. We've got four reasons to be thankful for that.
1. Down Payments Make Getting Approved Easier
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. This is known as having skin in the game. 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.
Another reason an approval may come more easily with a down payment, especially if you make on that's larger than required, is that the more you put down, the less you're borrowing. It's typically easier to get approved for a more modest loan as a bad credit borrower.
2. A Down Payment Lowers Your Monthly Payment
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 actually increases the overall amount of your loan. The longer you owe for, the more interest charges accrue, which can rally 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
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, make larger than required monthly payments, and pay off your loan that much faster.
4. 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. This also means that at some point soon after you take out an auto loan, you could end up owing more for the vehicle you're driving than it's worth. This is known as having negative equity, and it's not the position you want to be in for long, if at all.
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.
Additional Benefits and Requirements of Down Payments
A down payment can do everything we've listed and more! When you’re approved for an auto loan, you may be able to qualify for a lower interest rate or different loan terms if you make a larger payment up front. The amount required for a car loan varies by lender and your situation.
Typically, subprime lenders that assist bad credit borrowers always require a down payment. The minimum down payment amount is usually around $1,000 or 10% of the vehicle's selling price. Sometimes, it’s whatever is less, and trade-ins with equity can help meet the requirement as well.
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 the 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! To get started on your road toward a car loan, fill out our auto loan request form. It's fast, free, and there's never any obligation!