When you need auto financing with bad credit, a down payment will provide you with many benefits, yet most people still view it as a drawback. In reality, the drawbacks become especially evident when a borrower doesn’t provide any money upfront. Here are some issues you might face if you don't have a down payment.
Most subprime lenders require a down payment, but the amount will vary for each borrower, depending on credit and vehicle choice. Coming up with a down payment will increase your chances of being approved because it's been shown that borrowers are less likely to default on a car loan they have invested money in.
The minimum down payment amount varies by lender, although most require either 10 percent of the selling price or $1,000, whichever is less. Borrowers who can’t pay at least the minimum amount will usually have a hard time getting approved.
Higher Interest Charges
Each monthly payment includes an interest charge based on the amount owed. When a down payment is provided, it reduces the total amount of the loan, which also lowers the interest charges over loan term.
Longer Loan Terms
Without a down payment to reduce a portion of the selling price, a borrower may be faced with a longer loan term in order to make those monthly payments affordable. Stretching a loan to 72 months (six months) is common, but may not be a good idea, especially if you have bad credit. A lot can happen to a vehicle during that time, which could leave some borrowers paying for a car that no longer runs.
Negative Equity for Longer
Equity is the difference between the value of a vehicle and the amount owed on a loan. When the loan balance is more than a vehicle is currently worth, it’s known as being “underwater” or having negative equity. This can lead to problems if your car is stolen or totaled, or when it’s time to trade the vehicle in.
If a vehicle’s value is less than the loan balance, the remainder either has to be paid out-of-pocket, or “rolled into” a new loan. If the balance is rolled over, however, it'll increase the amount of the new loan, resulting in higher interest charges.
All of these drawbacks can be reduced or even eliminated with a down payment. Being prepared before you begin the financing process can be a big help, especially if you know your credit situation will leave a lender asking for money up front.
If you’ve saved up for your next vehicle, but don’t know where to turn, Auto Credit Express can help. We work with a large network of special finance dealers who have the lenders available to assist people with damaged credit. It’s easy to take the first step with our no-obligation, free service. To begin, simply fill out our online auto loan request form today.