We recommend that you make a down payment on an auto loan if you have bad credit. The bigger the down payment, the better off you are, but it's not always possible for people to come up with a lot of money to put down. Read on for tips for lowering your down payment on a car loan.
Recommended Down Payment Amounts
If you have bad credit, you typically have to make a down payment on an auto loan. It's usually a requirement with all subprime lenders, as well as with buy here pay here (BHPH) dealerships.
Typically, subprime lenders require $1,000 or 10% of the vehicle's selling price, whichever is less. A BHPH dealer tends to ask for even more, depending on the price of the car you're buying.
When you're researching your next vehicle purchase, chances are you're going to come across a few common recommendations. These include: putting 10% down on used cars, putting 20% down on new vehicles, and making the biggest down payment you can so you don't have negative equity when the time comes to sell or trade in your car.
Those numbers were the typical standards, but the truth is the numbers have changed over the years. Research data from Edmunds in 2017 notes that the average new vehicle down payment hovers right around 12%. One reason borrowers no longer put as much down as they once did is the rising price of cars.
According to Kelley Blue Book, the average price of a new vehicle in 2019 is nearly $37,000. If you want to make a down payment of 20% on a new car in that price range, it would come out to $7,400. That's an amount that most people just don't have lying around.
If you have the cash to do this, great! If you don't, or can't see a reason to spend so much up-front, there are options other than making a larger down payment than lenders require.
4 Options for Lowering Your Down Payment on a Car Loan
Even though a down payment is almost always required when you have bad credit, there are a few cases where you may want to skip the big down payment up-front.
Here are four ways you only need to meet the minimum down payment:
- Buy a used vehicle – If the car you're financing is reasonably priced and has already passed its major depreciation points at three and five years, chances are you aren't going to be upside down on your loan for long. In this case, 10% of the vehicle's selling price is often enough, especially if you plan on driving it for the remainder of its life.
- Buy a reliable car with good resale value – If the new vehicle you're getting is from a brand known for good resale value, you may not need 20% as a down payment. In theory, the slower a car depreciates, the higher the vehicle’s actual cash value (ACV) is when you go to sell it or trade it in. This slower depreciation also means you should be able to get ahead of the ACV sooner.
- Get a cosigner with great credit – If your credit doesn't qualify you for the best interest rate or a low down payment, you may be able to tip the scales in your favor by adding a cosigner with excellent credit to your loan. Cosigners help give your credit a boost by "loaning" you their good credit, which can give lenders the incentive to decrease the amount of your down payment.
- Cover the GAP – GAP insurance is specifically designed to cover the difference between what you owe on the loan and what the car is worth should anything happen to it, such as being declared a total loss or having it stolen. There's no need to provide a large down payment if you aren't going to be affected by the fallout from negative equity.
The Bottom Line
It comes down to this: if you have to make a down payment, make the right choice as to how much to put down. Down payments help by lowering the amount you have to finance, which leads to saving money in the long run. If you have the cash for a large down payment, go for it, but there's nothing wrong with just meeting the lender's minimum requirement!
If you've saved for a down payment but haven't found the right lender to work with your credit situation, let Auto Credit Express help. We work with a nationwide network of special finance dealerships that have the lending resources available to work with people in bad credit and no credit situations.
Don't wait any longer to get the vehicle you need. Fill out our fast, free, and easy auto loan request form, and we'll start the process of matching you to a local dealer!