Making a down payment is often part of the auto loan process, and one is typically required if you have bad credit. The good news is you don’t usually have to put a lot of money down, and you can use your trade-in to meet the down payment requirement.
Using Trade-In Equity as a Down Payment
Using your trade-in as a down payment is a great way to meet the money down requirement without feeling obligated to use your own cash. However, you need to make sure your trade has equity.
Equity is the difference between your car’s actual cash value and the amount you owe on the loan. For example, if you have a trade-in worth $7,000, and you owe $3,000 on the loan, you have $4,000 in equity that can be used as a down payment. If the numbers are flipped, and you have $4,000 in negative equity, trading in your vehicle can be tricky.
In the case where you have negative equity, you generally have three options to consider: pay off the difference with your own money, roll the balance over to the next loan (not all lenders allow this), or wait until you’re no longer upside down.
Waiting is often the best option, but if you need a car now, make sure you discuss your negative equity situation with the lender and see what they can or can’t do to help. Plus, when you roll over the balance, you end up paying for two loans at the same time – which could really put a dent in your finances.
Making a Down Payment on a Bad Credit Auto Loan
If you have great credit, you may not even need a down payment, but you typically can't avoid needing one with bad credit. How much you need to put down depends on a few factors, including the type of lender you're working with. You can use the equity from your trade-in, cash, or both to meet the requirement.
Subprime lenders – lenders that work with special finance dealerships – generally ask for a minimum of $1,000 or 10 percent of the vehicle’s selling price down, whichever is less, and require a minimum amount to finance of $5,000. So, in theory, you may only need $500 down to meet the down payment requirement.
As for buy here pay here (BHPH) dealers, the amount of money down needed is even more varied. BHPH dealerships are also lenders, and there's usually no set minimum because it all depends on the price of the car you end up financing.
Auto Credit Express Tip: If you're working with a subprime lender and have the means to, you should make the largest down payment you can. Not only do your approval odds increase, but your monthly payment and total interest charges decrease.
The Bottom Line
Using trade-in equity as a down payment, or selling your vehicle on your own and putting the money you get down, is a great way to meet the requirement and make the loan more affordable.
You can also put more money down by adding cash, which can save you even more money down the road. To see how a down payment can help you save money, use our payment calculator and plug in some different amounts.
If you have a trade-in you want to use as a down payment on your next car loan, but don’t know where to find a dealer that has the lending resources you’re looking for, we can help.
At Auto Credit Express, we're teamed up with dealerships all over the country that specialize in helping people with less than perfect credit. Get started by filling out our free and easy auto loan request form today.