Here are some simple numbers to think about: $1,000, 10%, and 20%. What do all these numbers have in common? These are the most often recommended amounts to use when it comes to a car loan down payment. But how do you know what's the right amount for you to pay for a used car?
Often, a $1,000 down payment on a car is a standard requirement for a bad credit auto loan. Is it enough, though? It largely depends on your personal budget and how much interest you’re willing to pay when you finance.
Minimum Down Payment on Used Car
Many people ask us what the minimum amount needed for an auto loan down payment for a used car is. The truth is that there's no one solid answer when it comes to down payments. However, when you're talking about bad credit car loans, there’s a minimum amount that lenders typically ask for – at least $1,000 or 10% of a vehicle's selling price.
If you’re a bad credit borrower working with subprime lenders or in-house financers, then you can expect a down payment requirement of at least this amount, or sometimes whichever of the two is less. However, some buy here pay here dealerships can require up to 20% of the vehicle’s selling price.
If you're dealing with poor credit, there's no getting around the down payment requirement. Though the minimum amount varies by lender and car selection, you have to meet the requirements if you hope to get the auto loan you need.
If you’re looking to purchase a used car for around $10,000, then $1,000 is a decent down payment. It’s widely advised to put down at least 10% of the vehicle’s value to increase your odds of getting approved for a loan, and to minimize your interest charges. If you want something more pricey than $10,000, you may need more than $1,000 down, but this depends on your individual situation.
Even though there's a specific amount you're required to pay, putting down a larger amount can save you money in the long run. In fact, the larger the down payment you make, the more money you can save overall. We recommend trying out our car loan payment calculator to see how much of an impact your down payment size can have on your monthly payment.
Additionally, making a larger than required down payment is a good way to make the most of your car loan. A big down payment can do a lot more than save you money. It can change the loan terms you may qualify for or even help you qualify for a different type of vehicle.
Let's take a look at how different down payment amounts could affect your loan in the future.
Choosing Your Down Payment Amount
Imagine you're purchasing a used car that costs $6,000 and taking out a 48-month loan. Since people with poor credit often qualify for higher interest rates, let's say you're looking at 12% interest, and are asked to make a down payment of 10% of the vehicle's selling price (for example purposes, we're calculating without tax, title, or license fees, your actual costs will vary).
- Negotiated selling price: $6,000
- Interest rate: 12%
- Loan term: 48 months
- Down payment: $600
In this example, your total loan amount at the end of 48 months is $6,826 and you've paid $1,426 in interest while making a $142.20 payment each month. However, if you raise the down payment amount, you lower the overall amount you need to finance, which lowers how much you pay.
Now look at the same scenario using a down payment of $1,000:
With this down payment, you're looking at a total loan amount of $6,320 and only paying $1,320 in interest charges while your payment drops to $131.67 a month. As you can see, the more you use as a down payment the more you can save.
These examples show the impact on a used car loan. The greater the cost of a vehicle, the more potential you have to save by making a larger down payment.
Benefits of Down Payments
Putting cash down lowers the cost of financing. It’s recommended that borrowers put some money down on a vehicle to minimize interest charges and be able to afford a shorter loan term since most car loans use a simple interest formula.
Simple interest means your interest charges add up daily based on your loan balance. The larger your loan amount, the more interest stacks up, and the higher your interest rate, the more you're charged to borrow money. By putting cash down, you save money because you’re borrowing less, and therefore you rack up fewer interest charges.
Down payments can also widen your vehicle selection as a bad credit borrower. If you finance a vehicle with a subprime lender, your maximum monthly payment is determined before you choose a car. By having more money to bring to the table, it can open up your car options.
So, if you're looking at these numbers and thinking, "pfft, that's not a huge savings, only a few hundred bucks," you're right. In this scenario, you're only seeing a few hundred dollars saved, but that can go a long way, especially in rocky economic times like these. Other benefits you're likely to see from a down payment impact your auto loan itself, not only how much you pay for it.
A large enough down payment can help you qualify for a shorter loan term. Sometimes, people with poor credit are signed up for longer-term loans to bring a monthly payment into a more manageable range.
Everyone wants a low car payment, but don't forget that interest plays a huge part in an auto loan and the longer you're paying for it, the more money someone makes off you. If you don't play your cards right, you could end up paying more for a vehicle than it's worth when you stretch a loan term too far.
Speaking of interest, a large enough down payment may even allow you to qualify for a lower interest rate. This is rare, but if you're putting enough down on a car, you may be able to negotiate for a lower interest rate.
Why Are Down Payments Required With Bad Credit?
Down payments are also called skin the game, and they show a lender that you’re able and willing to put some of your own money on the line to qualify for a car loan. Additionally, down payments lower the odds of the loan falling into default, since you’ve invested some of your own cash, and it lowers the total amount you need to finance.
Subprime lenders – indirect lenders signed up with special finance dealerships – often assist borrowers with credit challenges. They can often work within credit situations such as bankruptcy, poor credit due to past financial struggles, or no credit borrowers. However, they still almost always require a down payment to start the loan off on the right foot.
ACE Tip: Trade-in equity is also considered cash down on your next vehicle purchase. If you have a trade-in that you own or that has equity, then it can help you put more money down or help you meet the down payment requirement of an auto lender.
Ready to Get on the Road?
Now that you know the ins and outs of making a down payment on a used car, you can start searching for the vehicle you need and a lender that can get you into it. However, finding a lender that can assist with credit challenges can be tough. Here at Auto Credit Express, we want to help you along the way with our nationwide network of dealerships.
Over the last 24 years, we’ve cultivated a network of special finance dealerships that assist borrowers with unique credit situations in getting the car loan they need. These special finance dealerships know how to work with bad credit borrowers and their down payment situations. To get matched to a dealer in your local area, complete our free auto loan request form! There’s never an obligation to buy, so get started now!