Down payments seem to be constantly getting a bad reputation. Phrases like “you want how much?!” and “I don’t have that kind of cash!” are commonly uttered by consumers. While the general consensus seems to be against making a down payment, the pros of putting money down on an auto loan far outweigh the cons. Take a look:
Down Payments Save You Money
When you get a car loan, interest rates are charged on the balance you owe. Each day, interest charges accrue based on how much you owe.
However, the more money you use as a down payment, the less you have to borrow. This means there’s a lower balance subject to interest charges, and you pay less in interest charges in the long run.
Down Payments Show Willingness
By making a down payment, you’re showing the lender that you’re willing to invest your own money in the auto loan. This gives them a chance to really see that you’re serious about successfully completing the loan.
Down Payments Shorten Negative Equity
When you’re financing a vehicle, there usually comes a time when you owe more on your loan than the car you’re financing is worth. When this happens, it’s called having negative equity.
Negative equity typically happens at the beginning of a loan term, especially with a new vehicle purchase, because all cars starts to lose value as soon as you drive them off the lot.
However, down payments reduce your loan balance from the jump. This gives you a better chance of shortening the time you're upside down, or eliminating it altogether.
Is Zero Down an Option?
Something people usually ask about is qualifying for a zero down auto loan, but these types of loans are rare, often reserved for borrowers with great credit. Bad credit borrowers are typically required to make a down payment.
If you aren’t able to come up with a down payment now, or can’t save for one ahead of time, when can you? This is an important question that has to be answered, because it determines whether or not you’re prepared to actually get a bad credit car loan right now.
If you can wait to get a vehicle, you can also take the time to save for a down payment. You may even be able to build your credit while you’re waiting. If you’re in dire straits, have bad credit, and need a car now, your options are going to be limited if you don’t have the cash for a down payment.
Often, the resistance to making down payments comes when people – especially those with bad credit – assume their requirement is going to be so large that they can’t come up with the cash, and this just isn’t true.
Many lenders that work with people in bad credit situations know how tough it can be to save for a big down payment. Typically, these lenders ask that you pay a minimum of $1000 or 10% of the vehicle’s selling price, whichever is less.
Making a Down Payment
Another misconception that people have about down payments is that you have to come up with a lump sum of cash, which can be difficult. In truth, however, you don’t have to make a down payment only in cash.
In fact, there are three options for making a down payment:
- Pay cash – You can make a down payment in cash if you’re prepared to do it.
- Use trade-in equity – If you have a car to trade in, you can use any equity toward your down payment.
- Make it a combination – You can also combine cash with trade-in equity to cover a lender’s required down payment, or to make an even larger down payment, which saves you more in the long run.
If none of these options work for you on your own, you have one last option: get a co-borrower or cosigner to help you get a loan. Cosigners and co-borrowers may be able to help bring down the amount of money you need for a down payment because, in these situations, you “borrow” their good credit for lenders to base your loan approval on. This could lead to a lower down payment requirement, and possibly a lower interest rate.
The Bottom Line
You usually need a down payment when taking out a bad credit auto loan, but this don’t have to scare you off from making a vehicle purchase. Applying with the right lender that knows how to deal with unique credit situations can help, and we know where to find them.
Here at Auto Credit Express, we work with a nationwide network of special finance dealerships that have subprime lending resources. When you’re ready to get a car loan, we can point you in the right direction.
Simply fill out our easy and free auto loan request form, and we’ll work to connect you with a local dealer.