It's true that a down payment is one of the best things you can do for yourself in terms of getting a good deal on an auto loan, especially when you have bad credit. Though there's no such thing as a down payment that's too large, you might save some money by paying for a car outright if you have the cash. However, if you want to improve your credit score, an auto loan may still be the way to go.
A Down Payment’s Impact on an Auto Loan
When you make a down payment on an auto loan, you're lowering the amount you have to finance. This means paying less for the vehicle overall by saving money in interest charges. This can be a big plus for borrowers with poor credit because the lower your credit score, the higher the interest rate you're likely to qualify for.
Interest is the cost of borrowing money. The lower your rate, the less you pay to finance a car. Interest is accrued daily based on the unpaid principal balance of your loan, so making a large down payment means there's less money for you to be charged interest on.
A large down payment not only saves you money, it can make a difference in other ways as well. A down payment shows lenders that you're willing to invest in your own success. In fact, borrowers who make a significant payment up front are more likely to complete their auto loan with fewer bumps in the road – most people don't want to feel like they threw away their money in vain.
Depending on your lender and your situation, a down payment can help you qualify for a lower interest rate, get offered a wider selection of vehicles to choose from, or qualify for a more favorable loan term. Additionally, if you make a large enough down payment, you can shorten or eliminate the time your car spends with negative equity!
The down payment amount you're required to have on an auto loan varies by lender and individual situation. In some traditional lending situations, you may not need much down if you have good credit. However, if you have bad credit, lenders typically require a down payment of around $1,000 or 10% of the vehicle's selling price.
Using a Large Down Payment Wisely
If you have a large amount of money to put down on a car loan, you certainly can. Making the biggest down payment you possibly can afford gives you the chance to qualify for a much better vehicle than you may have otherwise. You could also get a more moderately-priced car and get yourself a smaller monthly payment.
As we mentioned, one of the benefits to a down payment is keeping your vehicle out of negative equity. When you have negative equity, you owe more on your auto loan than the car you're financing is worth. This happens more than you might think, especially with newer vehicles. This is because depreciation robs your car of value – around 11% of a new vehicle's value is lost on average as soon as you drive it off the lot.
Depreciation is defined as the loss of value over time, and it can't be stopped. You can slow or stop it's impact on your car's equity, though. When you make a down payment of at least 20% of your vehicle's value, you’re setting yourself up for future equity success.
The more you put down, the more equity your vehicle can retain. If you choose to use a bigger down payment, say 50% of the car's selling price, you eliminate the need to worry that there won't be any value left in your vehicle if you need to trade it in or sell it before your loan term is over.
One downside to using a down payment that's so large is that it could deplete your savings. It's a good idea to keep a bit of money in the bank as a car owner. This way, you're not stuck in a bind if anything unexpected happens.
Why Not Just Buy a Car for Cash?
If you have a significant amount of money to put down, you may want to consider purchasing a used vehicle for cash. This way, you're not saddled with a loan payment for the next five to eight years or more. If you're looking at financing a car with a price tag of $10,000 and plan to use a $5,000 down payment, you could opt instead to purchase a used vehicle for just the 5K, and not worry about it.
If you're struggling with credit issues, though, an auto loan is a wonderful way to build credit. So, you could take your $5,000 down payment and cut a $10,000 loan in half. This means you're only financing $5,000, which makes a huge difference in the amount you have to pay each month. Having an affordable loan payment means you're more likely to be able to make all your payments on time, which raises your credit score.
Additionally, financing allows you to expand your car options. If you want a nicer, newer vehicle, but don’t have all of the cash on hand, you can put what you have down and finance the rest.
Let Us Point the Way
Improving your credit with an auto loan is a great way to qualify for better rates and terms on your next loan. Bad credit borrowers who need a car loan may feel like they don't have many options, especially if you've been turned down for lending before. There are lenders out there for people who are struggling, and they're called subprime lenders.
They base your auto loan approval on factors besides just your credit score, and are only found through special finance dealerships. Here at Auto Credit Express, we know where to find the lenders you're seeking.
In fact, we have gathered a large network of these dealers all across the country, and we want to connect you to one in your area. If you're ready to take on a car loan simply fill out our secure auto loan request form today.