Down payments are required for bad credit auto loans by most lenders. There are a few different reasons lenders require money down, and they're not just for their sake. A down payment saves you money overall on your car loan.

Down Payment Requirements on Car Loans

Why Are Down Payments Required for Bad Credit Auto Loans?As a credit-challenged borrower, it may seem inconvenient to have to come up with money to put down. The reality, though, is that if you don't make one, you're going to end up with a larger monthly payment and higher interest charges over the term of your loan.

Because of this, the larger the down payment you make, the better off you are. However, lenders know that not every borrower can come up with thousands of dollars in one fell swoop, so many of them have a set minimum down payment requirement.

Typically, this requirement for borrowers with poor credit is at least $1,000 or 10% of the vehicle's selling price, whichever is less. If you're working with an in-house financing car dealer, you can generally expect a higher down payment requirement – sometimes 20% of a vehicle's selling price or more.

Why Down Payments Are Required

From a lender standpoint, requiring a down payment for big-ticket items like a car does two things. First, it protects at least a portion of their investment in a depreciating asset. This way, in case of loan default, the lender stands to lose less if your vehicle is repossessed and sells at auction for less than the loan balance.

Secondly, lenders like to see borrowers have some "skin in the game." By investing your own money down, lenders can see that you're serious about successfully completing the loan, and willing to use your hard-earned cash to get the process started.

Though lenders require a down payment from credit-challenged borrowers for the reasons above, there are actually many more reasons you should want to put money down.

Here are six advantages that you're likely to see by providing a down payment on an auto loan:

  1. Reduce loan amount – Putting money down lowers the overall loan amount.
  2. Lower monthly paymentDown payments lead to a lower monthly payment.
  3. Less interest charges – Putting money down means you owe less, which means you pay less in interest charges during your loan.
  4. Helps you get approved – If your lender is on the fence about approving you, a bigger down payment could give you an edge and be the reason they give you the green light.
  5. Lower interest rate – If you put enough money down, you could reduce your interest rate.
  6. Counteract depreciation – Down payments also offset depreciation. This means putting more money down is going to lower the length of time your car has negative equity.

Even with all these benefits, you may be worried about having to come up with the cash. Cash is king when it comes to down payments, but it may not be your only option.

In many cases, you can use the equity in a trade-in as money down. You can also combine your equity with cash to cover your required down payment. In rare cases, you might be able to put a portion of your down payment on a credit card, but this isn't always a good idea due to high credit card interest rates.

One thing you can't do is use a loan for a down payment. This doesn't constitute having skin in the game, and most lenders won’t allow it.

Ready to Find Your Next Auto Loan?

As you can see, down payments are just as much of a benefit to you, if not more so, than they are to a lender. If you have money to put down and are ready to find your next vehicle, Auto Credit Express wants to help.

We're teamed up with a nationwide network of special finance dealerships that are signed up with subprime lenders that work with borrowers with less than perfect credit. We'll match you with a dealer in your local area if you begin by filling out our fast and free auto loan request form. The process is simple to get started, and there's never any obligation to buy.