Down payments are more to a lender than simply cash in their hand – they offer security that can help you repay your loan more effectively. Here’s why auto lenders require down payments, and why bad credit borrowers are more likely to need one.
The Real Reason Lenders Require Down Payments
One of a lender’s most pressing concerns when a borrower applies for a loan is, “Does this borrower have the ability to repay this loan?”
Auto lenders often require borrowers to have a down payment because it lowers the chances of default. When you stop paying on your loan the lender has to repossess the vehicle. Research has shown that borrowers that bring cash to the table, or have “skin in the game,” come with a higher chance of making payments on time and completing their loan.
And to an auto lender, your ability to successfully make your payments on time throughout the entire loan term is one of the biggest eligibility factors for vehicle financing.
A Down Payment Benefits You, Too!
If you bring a down payment, it also offers you many advantages and the opportunity to save money on your next auto loan.
Down payments lower the amount you need to finance, lower your car payment, and prove to the lender that you’re financially sound enough to save money for the requirement. Since they're applied directly to the vehicle’s selling price, it can also decrease the interest charges over your term, because most car loans use a simple interest formula.
How much cash should you have for a down payment? The old standby requirement has been 10% of the selling price for a used vehicle, and 20% for a new one.
However, 20% down on a brand new vehicle has been falling out of practice in recent years, due to the rising prices of new cars. Many auto lenders still require at least 10% down or $1,000, especially if your credit score isn’t perfect.
Remember that trade-in equity can also be used to meet a down payment requirement of an auto lender, or use a combination of trade-in equity and cash, too.
Down Payments and Poor Credit
Bad credit borrowers are more likely to need a down payment than good credit borrowers. Lenders often use your credit score as a way to judge your ability to pay creditors on time and consistently since your credit reports are a record of your past loan management. If you have less than perfect credit, a large down payment can sometimes make up for your lower credit score if you work with lenders that accommodate credit challenges.
Your income, work history, credit score, and down payment amount are typically the most important factors in your overall eligibility for a car loan. With a long-standing employment history, enough income to afford the loan, and a down payment that shows your willingness to pay, you can be on the right track for approval.
Thinking About a Car Loan? Start Planning Now
If you’re preparing for your next auto loan and your credit score isn’t great, it’s a good idea to start saving for a down payment now. Even if you find a lender that doesn’t require you have cash down, down payments are still very beneficial to you as a bad credit borrower. Since borrowers with lower credit scores are more likely to be assigned a higher interest rate, having cash to put down on a car decreases the amount you're financing and saves you money.
Knowing you’re likely to need a down payment, you can start a savings plan based on the price of the car you’re looking to purchase.
Do you have a budget you want to stick to? Compare vehicle values using online tools, research average interest rates for borrowers with credit scores similar to yours, and plan for how much cash you want to bring to the table. If the car you want comes with too high of a monthly payment, you can do some quick math with an auto loan payment calculator to see how large of a down payment you may need to get the monthly payment you want.
Down Payments on Bad Credit Auto Loans
Borrowers with poor credit can struggle to get auto loan approval. If you’re ready to get a vehicle and need a dealer with bad credit lending resources, consider a special financing dealership. These dealers are signed up with subprime lenders that specialize in assisting borrowers with credit challenges.
If you apply for a car loan with a subprime lender, know that you typically need to get approved first before you can choose a vehicle. If you’re eligible for financing, the subprime lender sends the special finance manager the maximum car payment you qualify for, and then you choose a vehicle that fits within your limit.
Having a large down payment can widen your vehicle choices as a bad credit borrower. If you want a pricer ride, putting more cash down can open up your options despite having a lower credit score. And, if you want some negotiating power while car shopping, having a large down payment may give you the ability to haggle on your interest rate, and increase your overall approval chances.
Get on the Path to Your Next Auto Loan Today!
If you need a subprime car loan due to bad credit, let us be your guide at Auto Credit Express. Over the last two decades, we’ve created a coast-to-coast network of special finance dealerships that assist with credit challenges. Get started on the path to your next car loan by filling out our free auto loan request form. It’s quick, free, and carries no obligation – we’ll get right to work looking for a local dealer that has bad credit lending resources.
