Why most high-risk lenders will require some type of borrower participation for an auto loan
Car Loans and Down Payments
You can call it what you will – down payment, borrower participation or even loan equity – but most high-risk lenders will require consumers to have some type of stake in their car loan.
Statistics have shown that loans with buyers who have contributed a down payment tend to perform better than loans without a down payment. In other words, buyers who have invested their own money in a car loan have a tendency to pay those loans on a more regular basis than buyers who haven't.
This being the case, most problem credit lenders will require anywhere from $500 down for an auto loan to $1,000 down (or 10 percent of the selling price, whichever is less). In some cases, a down payment only has to cover the charges associated with a vehicle purchase – sales tax, title, license and dealer documentation fees.
Keep in mind, however, that a down payment doesn't have to consist of just cash. Borrowers with a paid-off vehicle or one with equity (if it's worth more than the loan payoff) they're planning on trading in can use that equity for a down payment. Many times dealers that advertise auto loans with no money down will still be looking for other collateral such as a trade in intead of cash.
But in addition to having equity in the new vehicle, a down payment can also offer a number of other advantages including:
- Down payments often mean buyers can qualify for a lower interest rate.
- Down payments lower the loan amount contributing to lower interest charges.
- Down payments lower the amount borrowed, which can often mean shortening the loan term, reducing the interest charges (and sometimes even the interest rate) even further.
The Bottom Line
Instead of thinking of a down payment as a hurdle, car buyers with credit issues should think of a down payment as a way to save themselves money as well as a way of contributing to the success of their credit repair efforts.