Having cash down for an auto loan isn’t always required for every situation, but it is if you have less than perfect credit. Here’s why down payments are required for bad credit borrowers, and the benefits of putting cash down on your next car loan.
When Down Payments Are Required
Down payments are almost always necessary when your credit score is poor and you’re looking to finance a vehicle. But requiring you to bring cash to the table isn’t a punishment – it’s a way to improve your chances of completing the loan successfully.
Since a lower credit score can often indicate more risk to an auto lender, down payments are required because they lower the risk of default.
It’s been shown that down payments help borrowers finish their car loans. Putting cash down lowers the amount you need to finance, decreases your interest charges, and lowers your monthly payment. It’s also known as having “skin in the game,” and borrowers who invest their own money into an auto loan have a better chance of seeing the loan through to the end.
How Much Cash Down Do I Need?
Down payment amounts are largely based on the price of the vehicle and your credit score. If you have poor credit, expect to need at least 10% of the car's selling price. Some bad credit (subprime) lenders may require at least $1,000 or 10% of its selling price, sometimes whichever is less.
As a good rule of thumb, the more expensive vehicle you choose, the more you need in cash to meet the down payment requirement.
If you’re not sure how much you should start saving for a down payment, first figure out what your maximum car spending limit is. From there, save at least 10% of that: if you want to buy a $10,000 vehicle, save at least $1,000. You can always put down more than the requirement amount, too, to save even more on interest charges and lower your monthly payment further.
How Cash Down Now Saves Cash Later
One of the biggest reasons borrowers willingly bring a down payment is they’re looking for a lower monthly payment. Since putting cash down on a car lowers the amount you need to borrow from a lender, it lowers your monthly payment, too.
Down payments also lower the amount you need to pay the lender for borrowing the money. Interest charges are the price you pay for financing. When you have bad credit, you may be assigned a higher interest rate, which means you’re charged more in interest charges. And those charges can stack up quickly on a large loan balance.
Auto loans typically use a simple interest formula, which means your interest rate is applied to the remaining balance of your car loan. The less you borrow, and the faster you can pay if off, the less you pay in interest charges.
Can I Only Use Cash as a Down Payment?
Cash is king, and many borrowers save up ahead of time – but it’s not the only way to meet a down payment stipulation because trade-ins with equity work, too!
If you have a vehicle that you own outright, you can use the entire trade-in value to help meet or completely satisfy a down payment requirement. Or, if you have a loan on your current car, and owe less on the loan than the vehicle's actual cash value is, that equity can be put toward your next car purchase. If there isn't enough to cover you with your vehicle equity alone, you can combine it with cash to make a bigger down payment.
While you can use cash or trade-in equity as a down payment, you can’t take out a loan to use as a down payment. Some dealerships occasionally accept a credit card to cover a down payment, it’s not recommended because credit card interest rates are usually high. Using a credit card as a down payment is also risky for your credit score as well, and many lenders that do accept credit cards as down payments only let you put a portion of your down payment on plastic.
Give yourself ample time to put money away for a down payment. Set a goal and price cap and cut out unnecessary expenses until you meet your goal.
Preparing for an Auto Loan
The best way to prepare for a down payment is to save for it. Taking out a loan for a down payment isn’t allowed, and using your credit card isn’t wise. Trade-ins can be a great way to sell your current car and meet a down payment requirement, too.
Getting approved for an auto loan with a traditional lender isn’t a guarantee, even with a large down payment. That’s where subprime car lenders can help! They have the ability to work with all sorts of credit challenges, and they’re signed up with special finance dealerships.
If you’re in need of a vehicle, we want to help you get in contact with a dealer that knows how to assist bad credit buyers. Here at Auto Credit Express, we’ve created a nationwide network of special finance dealerships, and we want to match you to one in your local area. Start right now by filling out our free, secure, and zero-obligation auto loan request form.