"We'd love to get you into this car, but we're going to need a down payment." These words can be the deal breaker for some borrowers who are looking to buy a car. That's why it pays to be prepared.
Saying that having no down payment on a car is “bad” can be a little subjective. When you’re financing a vehicle, a down payment is often a requirement. If you have bad credit, having a down payment is typically a must-have. Oftentimes, whether or not you’re required to have a down payment on a car loan depends on your credit score. If you have bad credit, you can usually count on needing a minimum down payment to be considered for auto financing – in which case, the amount matters!
If you aren't familiar with the concept of a down payment, here is what it is: it is the amount of money you bring to the table for a loan. It helps show the lender that you are ready to commit financially to the loan.
Down Payments and Auto Loans
If you’re looking at financing your next vehicle, then you’ve likely heard that you should have a down payment, and it’s good advice. But if you don’t have the cash for a down payment, is it bad? Maybe, but it can also depend on your credit situation. Simply having a down payment doesn’t mean that you’re automatically eligible for financing, since you still need to prove that you can afford the auto loan payments. There's also nothing stopping you from putting down more than the minimum amount required now to save some cash in the future!
When you’re applying for an auto loan, your lender may require a down payment for you to be considered for financing. If you have bad credit, you can expect to need at least $1,000 or 10% of the vehicle’s selling price. The pricer the car you’re looking to get, the more you're typically expected to bring to the table up front.
In terms of lending, and how big of a payment requirement you’re likely to face is largely determined by your credit, the vehicle you want, and your lender. While small and big are subjective in terms of down payment, lenders are likely to consider a down payment less than $1,000 as small.
Down payments are often required for bad credit borrowers because lenders need to see that they’re invested in the car loan– aka skin in the game – borrowers who are invested are less likely to default. This means that a down payment on a car lowers your risk as a borrower, which can help you get approved by an auto lender if your credit is less than perfect.
As a bonus, having money to put down may also help you get into a more expensive vehicle! If you’re only approved for $5,000 in financing, but you want a $7,000 car, putting $2,000 down allows you to be able to purchase the vehicle you want. Down payments can close the gap between what you qualify for and something more expensive.
Why is a Down Payment Important?
One grand... that may seem like a lot, but there are other great reasons for having a down payment aside from showing good faith to a lender. Reasons that benefit you.
- It will lower your interest charges. By having money to put down, you are reducing the amount that you need to borrow from a lender, and this results in less expensive interest charges. It also means you now have a lower monthly payment.
- ReducesNegative Equity. Equity is the difference between a vehicle's value and what is owed on it, and negative equity is when you owe more than the vehicle is worth. When you provide a down payment, you immediately begin to build positive value in the car. This means that if you put down 20% on a car, you will be reducing the potential future financial damage in the event that the vehicle is either totaled in an accident or you choose to sell or trade it in shortly after purchasing it. In the accident scenario, your insurance will only pay off the fair market value of the vehicle (what it is currently worth), and in a sale/trade situation you can only get rid of it for the current value. In either case, you would still owe money on the loan. A strong down payment may keep that from happening.
- Down payments can also lower your car payments, since you’re financing less from an auto lender. Additionally, with a lower initial loan amount, there’s less to be charged interest on. Nearly every car loan nowadays uses simple interest, meaning you’re charged interest on what your remaining balance. The less you owe to the lender, the less you pay in interest charges.
- For borrowers with bad credit, high interest rates are often a concern. Those with lower credit scores are typically assigned higher rates, but a down payment can help combat those extra interest charges.
Down Payments Save You Cash
Down payments can protect you from negative equity, lower your monthly payment, and lower your interest charges over the course of your loan. In other words, having money to put down now can save you cash and headaches later. While putting lots of money down on a loan seems like more hassle than it's worth, it can actually be worth a lot. It's because borrowing money from an auto lender means financing, which means interest charges.
Interest is the cost of borrowing money, and the bigger and longer your loan, the more interest charges you pay. By putting money down on a vehicle, you’re financing less. This means your down payment matters when it comes to how much interest you’re going to be charged over the course of the loan.
If you want to purchase a $12,000 car with 12% interest on a 60-month loan, you’d pay $16,016 by the end of the loan. Although the vehicle was only priced at $12,000, the interest charges really stack up.
But if you put $2,000 down on the car, you’d only pay $13,346 for the vehicle, and that means a savings of $670 (after subtracting the down payment). This may not seem like a lot at first glance, but that’s about three car payments, or three extra months of paying on that car.
This is why putting down money on an auto loan is recommended for any borrower. It saves you money long term, and it can lower your monthly payment. In the above example, the loan with no money down had a payment of $267, while the loan with the $2,000 down payment had a payment of $222. Not only do down payments lower your interest charges, they can also help free up your disposable monthly income by lowering your monthly car payment.
When it comes to how much you should put down, a good rule of thumb is to strive for at least 10% of the vehicle’s selling price. If you’re looking at purchasing a brand-new car, aim for around 20%. New vehicles have a much higher risk of being in a negative equity position at the beginning of the auto loan, since they depreciate very quickly in the first few years of ownership.
You also don’t need to have your down payment in just cold, hard cash. If you have a trade-in, it can help cover a down payment requirement or knock some cash off on what you pay for your next car.
If you still owe on your trade-in, you need to pay off the remaining balance of your loan first. Then, you can use any leftover cash to put toward your next vehicle. If you own the trade-in free and clear, then the entire value can go toward your next auto loan.
Small or Big Down Payment on a Vehicle?
Most auto lenders that assist bad credit borrowers require either at least $1,000 or 10% of the vehicle’s selling price as a down payment. The pricer the car you’re looking to get
“More is better!” may be something to abide by when thinking about how much to put down on a vehicle, especially when you’re more likely to qualify for a high interest rate on a car loan. However, you don’t have to go broke.
As we said, most lenders are likely to expect at least 10% down on a used car. For new vehicles, you may need 15% to 20% down to meet a lender’s requirements. And the more you put down on a vehicle at the start, the lower your monthly payment, and the more you can save in interest charges.
It’s often recommended that you put down as much as you can reasonably afford, without completely draining your savings/safety net. A larger down payment could also increase your chances of qualifying for a car loan, too, since you’d be lowering the amount you need to finance and increasing your chances of successfully completing the loan.
Can I Put Less Than $1000 Down?
A down payment requirement with poor credit under $1,000 isn’t impossible, since all lender requirements vary, but it wouldn’t be something to count on. However, keep in mind that down payment requirements don’t have to be satisfied with cash alone, because trade-in equity can be used to meet the requirement alongside cash or even by itself.
If you only have $500 or less to put down on a car, you may be able to get into an inexpensive, used vehicle. However, realistically, if you want something more than $10,000 and your credit score isn’t great, then you may have to use some trade-in equity or save up some more cash to be eligible for bad credit vehicle financing.
In the event that you are unable to come up with the 10% standard, or are only able to drum up $500 for a down payment, there is additional coverage you can purchase to ensure you don't take an extreme financial hit if the car is wrecked. It's called GAP Insurance. This will cover the difference between the loan amount and the fair market value of the vehicle. This can be either purchased at the dealership or through a third party. And you don't need to buy it at the time of the car purchase.
However, keep in mind that this type of coverage only applies to accidents or theft. If you are dissatisfied with the car and just want to sell it or trade it in, you will still be responsible for the remaining balance of the loan.
Saving Up for Your Next Auto Loan?
Whether or not you’re required to have a down payment largely depends on your credit score, and how much that amount matters to you depends on how much you’re willing to pay in interest charges. The minimum amount you’re required to put down can also depend on your lender and the price of the vehicle you’re looking to finance.
And if you’re a bad credit borrower, having a down payment matters a lot – in fact, you’re likely to need one to get into your next car loan. However, just having a down payment doesn’t mean you’re guaranteed to get into loan.
Traditional auto lenders may not even approve you if your score is too low, no matter how large a down payment you make. If you’ve run into the problem of getting turned down because of your credit score, it may be time to look into special financing.
Special financing is for borrowers with less than perfect credit, and it means you work with a subprime lender, and we know where they are! Here at Auto Credit Express, we have a nationwide network of dealers, and we’ll look for one in your area with special financing after you complete our free car loan request form. It's quick, secure, and there’s never an obligation to buy. Let’s get you back on the road with help from the right lender for the job!