Saying that having no down payment is “bad” can be a little subjective. However, no one is likely to tell you that you shouldn’t have one, especially if you have bad credit. In fact, it's likely to be a requirement with most bad credit auto lenders.
Your Credit and Down Payment Requirements
If you’re looking at financing your next vehicle, then you’ve likely heard that you should have a down payment, and it’s good advice. But if you don’t have the cash for a down payment, is it bad? Maybe, but it can also depend on your credit situation.
If you have good credit, a down payment may not be required by the lender. Whether or not you need one can also depend on how much financing you qualify for. If the car you want is $12,000, but you only get approved for a $10,000 auto loan, then you need a $2,000 down payment to get into that specific vehicle.
If you have poor credit, though, odds are you’re required to have a down payment in order to be considered for a car loan. Bad credit auto lenders typically require at least $1,000 down or 10% of the vehicle’s selling price (sometimes whichever is less) if you want to be in the running for a car loan.
The biggest reason that lenders ask borrowers to have down payments is that they prove that you’re invested in the auto loan – aka skin in the game. Borrowers who put cash down have a better track record of completing their car loans successfully, which is great for the lender and for you.
When you have less than perfect credit, a lender may be hesitant to approve you for an auto loan. With a down payment, however, it shows you’re willing to put your own cash on the line, which improves your chances of a car loan approval.
Why Having a Down Payment Is Smart
Down payments can protect you from negative equity, lower your monthly payment, and lower your interest charges over the course of your loan. In other words, having money to put down now can save you cash and headaches later.
Putting money down allows you to avoid negative equity by financing less right off the bat. Negative equity happens when you owe more on the vehicle than it’s worth. A few things can lead to negative equity, like having a high interest rate, or if the car loses value quickly (like new vehicles tend to do).
Down payments can also lower your car payments, since you’re financing less from an auto lender. Additionally, with a lower initial loan amount, there’s less to be charged interest on. Nearly every car loan nowadays uses simple interest, meaning you’re charged interest on what your remaining balance. The less you owe to the lender, the less you pay in interest charges.
For borrowers with bad credit, high interest rates are often a concern. Those with lower credit scores are typically assigned higher rates, but a down payment can help combat those extra interest charges.
How Much Should I Put Down?
When it comes to how much you should put down, a good rule of thumb is to strive for at least 10% of the vehicle’s selling price. If you’re looking at purchasing a brand-new car, aim for around 20%. New vehicles have a much higher risk of being in a negative equity position at the beginning of the auto loan, since they depreciate very quickly in the first few years of ownership.
You also don’t need to have your down payment in just cold, hard cash. If you have a trade-in, it can help cover a down payment requirement or knock some cash off on what you pay for your next car.
If you still owe on your trade-in, you need to pay off the remaining balance of your loan first. Then, you can use any leftover cash to put toward your next vehicle. If you own the trade-in free and clear, then the entire value can go toward your next auto loan.
Where Can I Find Bad Credit Car Loans?
Having no down payment and bad credit can mean bad news if you’re looking to take on a car loan. A down payment is great for any borrower, since it saves you cash over time and increases your chances of getting into an auto loan. However, even with a down payment and the income to pay for a car loan, lenders still may turn you away for financing if your credit score isn’t quite up to par.
There are auto lenders that work with borrowers in all sorts of unique credit situations, called subprime lenders. They're signed up with special finance dealerships, which are located all over the country. Pinning one down, though, can be a little bit of a challenge, but that’s where we come in.
Here at Auto Credit Express, we’ve already located the dealers that have bad credit lending resources. To get matched to a dealership near you that works with subprime lenders, fill out our free car loan request form.