A personal loan is a type of unsecured loan not backed by collateral, such as a car or house. Personal loans are installment loans, which means they have a fixed repayment term with a fixed interest rate. Lender rules state that you can't use a personal loan for a down payment on a vehicle because they want you to have your own money invested in the loan. However, there are other options for you to consider that may require some planning ahead.
Other Down Payment Options
If you can’t use a personal loan as a down payment, what are your options? You have three to consider:
- Trade equity – If you have a trade-in that has equity, you can apply that toward a down payment.
- Cash – If you don’t have a car to trade in, you can use your own cash to use as money down.
- Combination of both – If neither alone covers the down payment requirement, or you want to put more down, you can use both cash and trade-in equity.
If you have bad credit, you should make the largest down payment you can afford to. Not only do you increase your approval odds, you end up saving money by reducing your total interest charges and you lower your monthly payment.
Even borrowers with good credit can benefit from putting more money down, though to a lesser extent because they receive better interest rates than borrowers with poor credit.
Down Payment Requirements for Bad Credit
If you have bad credit, you're usually required to make a down payment. Lenders like to see that you’re invested in the auto loan and serious about completing it, so they ask that you put your own money into it.
With that being said, what exactly are the down payment requirements for those with bad credit? Well, it depends, and it’s not easy to put a definitive number to it. What we do know is that different bad credit lenders require different down payment amounts.
Subprime lenders – lenders that work through special finance dealerships – generally ask for a minimum down payment of $1,000 or 10% of the vehicle’s selling price, whichever is the lower amount. So, in theory, you could choose a model selling for $7,000 and only need $700 to meet the minimum down payment requirement.
Buy here pay here (BHPH) dealers– sometimes referred to as tote-the-note dealerships – are in-house financiers, meaning they’re both the dealer and the lender. They are one-stop shop car lots, and although it’s easier to get approved at one of these dealerships, their down payment requirement is typically steeper than a subprime lender's. In most cases, the amount of money down required is dependent on the vehicle you choose.
The Bottom Line
You can’t use a personal loan as a down payment on your next auto loan, but, with some planning, you can use your own money, a trade-in, or both.
Once you feel ready to get the car buying process started, we can help you locate a dealer near you that’s able to assist you. For over 20 years, Auto Credit Express has helped bad credit borrowers find auto financing by connecting them to local dealerships.
To get started, all you have to do is fill our free and fast car loan request form, and we’ll get right to work matching you with a dealer.