We receive plenty of questions from consumers every month here at Auto Credit Express - where we help car buyers with poor credit find auto financing. One recurring topic we are constantly asked about: getting a bad credit car loan without a down payment.
Just last month, we received over a half dozen questions from people asking if it is possible to get financed with no money down. The answer to that question is, typically, no. Furthermore, it isn't in your best interest to look for a zero down car loan if you have bad credit. Allow us to explain.
Almost All Subprime Lenders Require a Down Payment
The elephant in the room is that almost every single subprime lender has a down payment requirement. However, it is usually pretty reasonable. For example, the bad credit down payment standard is 10% of the car's selling price or $1,000, whichever is less. Some lenders require as little as $500 down.
In addition, there are a few other stipulations. Your down payment can be cash, trade equity, or a combination of the two. However, the cash can't be from another loan, and the trade-in has to be in your name. Also, if you were thinking of buying a new car, any manufacturer rebate does not count toward the down payment requirement.
Lenders have a down payment requirement because it increases the likelihood that you'll make regular and timely loan payments. In their view, borrowers are more likely to walk away from a car loan if they don’t have any of their own money invested in it.
Inevitably, some borrowers are going to default on their loans. In the case of car loans, lenders have a vehicle as collateral they can repossess to cover their losses. As such, they don’t like it when the amount owed on the loan is a lot more than what the car is worth.
This is where the down payment requirement comes in. A car loan's loan to value (LTV) ratio is expressed as a percentage that you can figure out by taking the loan amount and dividing it by the value of the car. For example, if you borrow $18,000 but the value of the car being financed is only $16,000, then the LTV would be 112%.
Because they want borrowers to pay a fair price, lenders set maximum LTV ratios they are willing to accept for bad credit car loans. Not only that, the lower the LTV, the better chance you'll have of getting approved for the loan.
In fact, a down payment is a way to reduce the loan to value ratio. The more money you put down, the less you need to borrow from the lender and the lower the LTV.
It's In Your Best Interest to Have a Down Payment
From the questions we receive, it appears that too many consumers view a down payment as an obstacle. That's completely backwards. When you need a car loan and have less than perfect credit, a down payment can help you out in many ways.
Here are the benefits attached to making a down payment on a subprime car loan:
- It helps your chances of getting approved because it lowers the principal and LTV ratio.
- A down payment also lowers your monthly payment amount thanks to that reduced principal. This will reduce the total amount of interest charges you'll end up paying.
- It makes shortening the loan term possible, which allows you to both pay less in interest charges and pay off the loan faster.
Basically, a down payment will help you get approved and save you money in the long run. It shouldn't be seen as an obstacle, but, rather, a tool to help you succeed.
The Bottom Line
Our team here at Auto Credit Express always recommends that borrowers with bad credit have a down payment ready. While you can typically expect to need 10%, bigger is always beneficial.
If you've got your down payment ready but are still struggling to get approved for a car loan, we'd like to help. We assist car buyers with imperfect credit by connecting them to local special finance dealerships. They specialize in helping people dealing with unique credit situations get financed.
Get started by filling out our free, simple and secure car loan request form today.