Do you know what most high-risk lenders will look for in terms of down payments and trade in value in order to qualify you for an auto loan?
Auto Loan Down Payments and Trade Ins - What's Needed?
Many of us here at Auto Credit Express have spent the past two decades dealing with car buyers that have experienced credit issues as well as the lenders willing to work with them.
Today we'll be taking a look at the down payment needed for an auto loan as well as trade-in requirements typical of many of these lenders.
Down Payments and Auto Loans
Despite all the ads you see for "no money down car loans with bad credit", the fact of the matter is, most subprime lenders require borrowers to come up with a down payment.
This can be handled with either real cash down – no rebates or incentives can be counted – or a trade-in with real equity.
Having said that, most of these lenders are looking for either ten percent down or $1,000 – whichever is less – as a minimum amount. These banks also aren't stupid and can smell an over allowance (showing the trade-in worth more than it really is) a mile off.
According to the information these lenders have accumulated over the years, they've also noticed that the larger the down payment, the more apt borrowers are to successfully complete a loan. This means that the larger the down payment – both as a percentage of the loan as well as the actual dollar amount – the better the chances of a loan approval, all other things being equal.
Trade Equity for Auto Loans
You'll also notice that we mentioned "a trade-in with real equity." In other words, the trade-in, unless it's paid off, has to be worth more than what is owed on it. Simply put, if the deal requires a $900 down payment and unless there's additional cash involved, the trade-in has to be worth at least $900 more than what's owed on it. Otherwise, the difference has to be made up in cash.
Following this logic, if the trade is actually worth less than what's owed on it (known as being "upside down"), lenders typically will require borrowers to come up with the negative amount plus the down payment, in cash, in order to satisfy the conditions of the loan approval.
You may be thinking that one way to get around this would be to hold onto the current vehicle, finance a second one, then let the first vehicle get repossessed. Not so fast, though. Most subprime lenders will only allow a borrower to have one car loan at a time, so the lien on first vehicle needs to be paid off (either as a trade-in or sold outright) before the new loan will be approved.
The Bottom Line
Most problem credit lenders require a down payment of either ten percent or $1,000, whichever is less. Everything else being equal, the higher the down payment amount, the better the chances for a loan approval.
In addition, if a trade-in is involved, the equity in the trade can be used towards a down payment. If there is no equity of if the trade is worth less than its payoff, the entire down payment plus cash that equals the negative equity will be needed in order to meet the requirements of the loan approval.
One final tip: Auto Credit Express has helped thousands of credit-challenged consumers find a dealer for their best chances at car financing for bad credit. So if you find yourself in this situation we invite you to fill out our online auto loan application to begin the process.