Most lenders who approve bad credit auto loans require a down payment. While that may not be what you want to hear, that's the reality of the situation. However, coming up with a down payment has its advantages, and it can even help you get approved.
A Down Payment Helps You
Very rarely is a borrower with poor credit approved for an auto loan with zero money down. Almost all bad credit lenders require a down payment. Typically, the standard requirement is 10% of the car's selling price or $1,000, whichever is less. This can be in the form of cash or trade-in equity (or a combination of those two).
Subprime lenders (the type willing to work with people with damaged credit) have different processes than more traditional ones. They closely examine many factors to get an idea of your situation when making decisions.
Basically, they look at your income, monthly bills, and more to get an idea of whether or not your finances can support a car loan. And a down payment does a lot to move the needle in this regard.
A down payment decreases the amount of risk for the lender. This is because it decreases the amount you need to borrow. Plus, it shows the lender that you are committed to the purchase because you are willing to put your own money on the line.
All in all, having a down payment helps you get approved for these reasons.
The Calculation Lenders Use
Lenders assess the risk of a particular auto loan by looking at a car's value compared to the amount being financed. The amount financed compared to the vehicle's value is called the loan to value (LTV) ratio.
The lower the LTV ratio, the better chance you have of being approved. At the same time, when the amount of your loan is greater than the value of the car you are financing (which means the LTV is higher), it means the lender would be assuming more risk in approving you.
This means you can improve your chances of getting approved by lowering the LTV ratio. The best ways to do that are:
- Choosing a car with a selling price that is close to its current book value.
- Having cash to cover tax, title and license fees so you don’t have to roll them into the loan amount.
- Providing a down payment.
Again, a down payment reduces the amount you need to finance. That, in turn, lowers the LTV ratio and increases your chances of an approval.
The Bottom Line
A lower loan to value ratio is an indication of less risk. The lower the risk, the better your chances of getting approved. That's how a down payment can help you get approved. But that's not the only benefit of putting money down.
A down payment also works in your favor in several other ways. Having one lowers your monthly payment and reduces interest charges over the loan term. Plus, it increases your equity in the vehicle. Therefore, a down payment will save you money and give you more flexibility.
So, don't think of a down payment as an obstacle. Think of it as something that's going to benefit you and your chances of getting approved.
If you are dealing with bad credit and are struggling to get approved for a car loan, it may be that you just aren't looking for financing in the right places. At Auto Credit Express, we help people dealing with credit issues find financing. You can be next if you simply fill out our free and secure car loan request today.