Car buyers with damaged credit usually want to know if they can quality for an auto loan with a zero down payment. The answer in most cases is "no" – unless they have a trade-in with enough equity to meet the lender's conditions.
And while this isn't the answer they'd hoped to hear, the reality is that down payments shouldn't be seen as a major obstacle to an auto loan because coming up with a down payment also has its advantages.
We know this here at Auto Credit Express because for more than two decades we've been helping borrowers with bad credit that have been searching for online car loans locate those dealers for their best chances at car loan approvals.
Dealing with down payments
It's also why we continue to urge car buyers to come into a loan with the largest down payment possible because the larger the down payment, the better chance they'll have of successfully completing their car loan.
Nearly all high-risk lenders require a down payment in the form of cash or real trade equity. That's because these lenders see it as a way to increase the odds that borrowers will make regular, timely loan payments.
The reasoning is simple enough: with little or no money invested in a vehicle, especially during the first two to three years when it can be worth far less than the loan balance, lenders stand to lose quite a bit of money if a borrower walks away from a loan. With an equity stake of at least 10% invested in a vehicle, lenders realize that it's far more likely those very same borrowers will continue making their monthly payments.
But from a borrower's point of view there are also advantages to this situation because a down payment can also:
• Reduce the monthly payment due to the lower loan principal. The larger the down payment, the lower the monthly payment
• Make shortening the loan term possible. Instead of accepting the lower monthly payment, borrower could reduce the finance term from, for example, from 60 months to just 48 months. The monthly payment will probably go up, although a large enough down payment could keep the payments the same. At the same time a large down payment reduces the time the vehicle is worth less than the loan payoff – a situation known as "negative equity."
Other advantages to consider
Here are some more advantages of a large down payment:
• Most subprime lenders take into account the down payment as a percentage of the loan amount – called loan to value or LTV. The higher the down payment, the lower the loan to value which means that, as the loan to value drops, the chances for a loan approval typically increase.
• Best of all, down payments also reduce the total amount of interest paid on the loan. This is especially important with the higher interest rates found with high-risk auto loans.
The Bottom Line
With any car loan, but especially one from a subprime lender, down payments are one of the best ways interest costs can be reduced.
Another advantage is that the larger the down payment, the sooner the buyer can trade out of the car or refinance it (provided payments have been made on time) into another loan with a lower interest rate.
Here's another good tip: Auto Credit Express specializes in matching consumers with damaged car credit to dealers that can offer them their best chances for approved car loans.
So if you're ready to establish your auto credit, you can begin now by filling out our online car loan application.