One thing that borrowers with bad credit are always interested in knowing more about is down payments. When it comes to a down payment on a car when your credit is poor, we get more than our fair share of questions. Recently, this question came to us from a potential applicant:
"Hello, I was wondering what would be a good down payment for a used car. I do not have very good credit, but I have a trade in…"
We'd like to take the time to answer this question about down payments and auto loans with less than perfect credit. Here at Auto Credit Express, we help people with bad, thin, or no credit find auto financing. It is something that we have specialized in for close to 20 years now, and we have a passion for helping people just like the author of this question.
A "Good" Down Payment on a Car When You Have Bad Credit
The question asks what would be a "good" down payment for a used car. There are two ways to look at this.
- What Subprime Lenders Want
More than a few borrowers we've encountered want to know about bad credit no money down car loans. The truth is that lenders who are willing to approve people with damaged credit usually require a down payment. The general minimum standard in subprime lending is $1,000 or 10 percent of the car's selling price, whichever is less. That's because lenders want borrowers to have some type of financial stake in these loans. They believe that a borrower's participation makes them more likely to make regular and timely loan payments.
- What Personal Finance Experts Recommend
The majority of personal finance and car buying authorities recommend that borrowers come to the table with 20 percent of the sale price. This recommendation usually applies to all people regardless of their credit. They recommend having that much largely because cars depreciate in value. If a borrower doesn't pay any money down, or they only make a small down payment, they will soon find that they owe more on the loan than their car is worth. This is known as being "upside down" or "underwater." Being upside down makes it much more difficult to trade it in or refinance the loan. This becomes even more likely when a borrower is dealing with poor credit, thanks to the higher interest rates charged by subprime lenders. Luckily, a large down payment helps a borrower build equity in a vehicle and avoid being underwater.
Additionally, a large down payment can help a borrower reduce interest charges by allowing them to finance a lower amount and possibly even shorten the loan term.
Trade Ins and Down Payments
The author of the question also says that he has a trade in, but doesn't provide much more information. Here's the skinny: subprime lenders are willing to accept cash, real trade equity, or a combination of the two for a down payment. So, this consumer would be able to use his trade in as part - or all - of a down payment as long as the vehicle is paid off or they have equity in it.
Here's something else that's good to know: if you plan on trading in a car to use as a down payment, it's a good idea to get an idea of what it is worth. You can get the true market value of your car on a number of websites that valuate vehicles, such as Kelley Blue Book or NADA Used Car Guide. It's important to be realistic when gauging the value of your vehicle, as exaggeration can over/under-inflate the value of the vehicle in your mind.
Finally, if you are the ambitious type, you can always try to sell your car privately. In most cases you can get more for an older car this way, but it is also usually more time consuming. Then, you can use the money from the sale as part (or all) of your down payment.
Helping You Get Financed
In conclusion, a "good" down payment depends on your definition of the word. The minimum subprime standard is $1,000 or 10 percent of the car's value, but financial experts would consider a "good" down payment to be closer to 20 percent.
With all of the benefits that are associated with having a down payment, a borrower will surely be better off with one. And when you are dealing with bad credit, the higher the down payment, the better the chances are for a loan approval.
If you have less than perfect credit and can't seem to get approved for a car loan, we can help. Auto Credit Express can connect you to a dealership in your area that will do everything possible to get you approved. Our service is free and our process is fast, so go ahead and fill out our secure auto loan application today.