When you have less-than-perfect credit, finding a bad credit car loan with no money down is going to be very difficult. A down payment is nearly always required with subprime financing as well as with buy-here-pay-here (BHPH) dealerships. The good news is that the down payment needed is usually reasonable, and you don’t have to use only cash to cover it.
Many car buyers with credit issues want to know if they can get an auto loan with no money down. Take this question we recently received from a potential applicant:
"Is it possible to get approved for auto financing and put $0 down?"
Yes, it's possible to get approved for a car loan with zero down. However, this is typically only an option for those with great credit. In fact, getting approved for a no-money-down auto loan can be a breeze for those whose credit is in tip-top shape. For bad credit borrowers, however, it's not so simple.
Auto Loans For Bad Credit With No Money Down
Consumers with bad credit would be wise to act as if the term "zero down car loans" doesn't exist. This is because virtually every subprime lender has a down payment requirement these days. So, if you're trying to finance a car with bad credit, expect to be asked to provide a down payment.
Subprime lenders are those who are willing to approve borrowers with damaged credit. Yet, they still have qualifications that must be met and one of them is often a down payment requirement.
The subprime standard down payment requirement is 10% of the car's price or $1,000, whichever is less. Your down payment can be cash or trade-in equity, or any combination of those two.
Here at Auto Credit Express, we know this because we have been helping borrowers with bad credit find auto financing for over two decades. This has given us unique insight into why these lenders operate the way they do.
The reasons they typically require credit-challenged borrowers to have a down payment are straightforward. Lenders see a down payment as a way to increase the chances of you making regular and timely loan payments.
Think of it this way: making a down payment is putting your own money on the line. It'd be much easier to walk away from a loan if you didn't have any money invested in the vehicle. But you'd surely be less likely to do so if you've put your own money into the car.
Down Payment Requirements
Just how much you need for a down payment depends on the lender’s requirements. As we stated, subprime lenders typically look for a minimum of $1,000 or 10% of a vehicle’s selling price, whichever is less. So, it’s very possible you could only need $500 down if you're financing a $5,000 car. With vehicle prices being on the rise though, you should expect to need a little more cash down.
BHPH dealers have a different approach, as their down payment requirement is usually dependent on the cost of the car. These dealerships could require more than a thousand down or around 20% of the price of the vehicle, depending on the one you choose.
It doesn’t hurt to ask what a lender’s down payment requirements are before submitting an application, but you can – and should – save up for a down payment in the meantime.
Making The Down Payment For A Bad Credit Car Loan
Have you heard of the 20/4/10 rule before? This budgeting rule states that you should make a down payment of 20%, finance a car for no more than four years, and have a monthly payment that's 10% or less of your pre-tax monthly income. It's a good starting point when figuring out how much you should be spending on a vehicle, but you don't have to follow this rule to a “T.”
Putting 20 percent down comes with a number of benefits, but it can be a lot of money for borrowers on tight budgets. It’s also well above the minimum amount required by most subprime lenders. If you want to aim for a down payment that’s close to 20% but aren’t sure how to reach the down payment requirement, there are some options:
- Trade-in equity – If you have a trade-in with an actual cash value that’s more than the loan balance (if it’s still being financed), you can apply that equity toward the down payment. If you own your car free and clear, you can use its entire value as a down payment. If, however, your trade-in has negative equity (it’s worth less than the loan balance), you’re probably going to have to come up with the cash to cover the negative equity plus more cash for the down payment. You can roll over the negative equity in some cases, but you end up paying for (and interest on) the new loan plus the negative equity in your old loan when you do this.
- Cash – If you don’t have a vehicle to trade in, you need to come up with a cash down payment.
- Combination – If your trade-in equity doesn’t cover the entire down payment requirement, or you just want to make a bigger down payment, you can combine cash with your trade equity.
A Down Payment Is Your Friend
A down payment shouldn't be seen as an obstacle to your auto loan. Rather, it should be viewed as something that really works to your advantage if you are dealing with poor credit.
In fact, the larger the down payment you are able to make, the more you are helping yourself out. Here are some of the benefits:
- It can help your chances of being approved because it lowers the loan-to-value ratio.
- A down payment reduces the amount of your monthly payment because it lowers the loan principal.
- Or it can make shortening the loan term possible so you can pay off the loan faster, which means paying much less in interest charges.
- It reduces the total amount of interest charges you'll pay on the loan.
- A down payment reduces the likelihood of you being upside down, which makes it easier to trade out or refinance sooner and more easily.
As you can see, it works in your favor to provide a down payment.
We’re Here to Help You
Remember, a down payment is there to help, not hurt, your chances of an auto loan approval. There are many ways you can save, budget, and get ready for a down payment ahead of time.
If you have a down payment now, but worry your credit’s holding you back from getting approved, we have a solution. Auto Credit Express has been helping people with credit problems find new and used car loans since 1999 with our nationwide network of affiliate dealers. Getting the process started is easy. Just fill out our simple and free auto loan request form, and we’ll get right to work matching you with a dealership in your area.