Not having a down payment can be a problem. In many cases, the lender will require a down payment in order to approve somebody with damaged credit. This may not be what you want to hear if your budget is tight, but it's the hard truth.
In certain cases, a borrower with bad credit will be able to qualify for a zero down program. It all depends on the requirements and programs offered by the subprime lenders a dealership works with. However, generally speaking, an applicant is able to qualify for better rates, terms and programs when they provide money down.
It can be frustrating when the dealer says something along the lines of "We'd love to get you in this car, but we are going to need an x.xx down payment." However, the larger the down payment you are able to make, the more you are helping yourself out.
Why it can be a Problem for Them
If you have poor credit, you are seen as a high-risk borrower. If you apply for an auto loan, the majority of lenders will deny you automatically upon seeing your credit score. Subprime lenders and the car dealerships they work with won't.
These lenders are willing to look past your credit score, and will evaluate other factors (like your income and monthly recurring debt) concerning your finances. Still, they will set minimum requirements that an applicant must meet. One of these conditions is often a down payment.
Nearly all subprime lenders require a down payment in the form of cash or trade equity. The industry standard tends to be 10% (of the car's price) or $1,000, whichever is less. The reasoning behind this is simple enough:
- Lenders stand to lose quite a bit of money if a borrower walks away from a loan in the first couple of years (when the loan balance is often greater than the car is worth). This is especially true when the borrower hasn't made a down payment.
- Over the years, they have noticed a positive correlation between a borrower making a large down payment and their ability to successfully complete a loan. It's easy to see why - a down payment gives a borrower a monetary stake in the vehicle and increases their sense of ownership.
Therefore, subprime lenders have a better chance of approving you if you are able to provide a down payment. The bigger it is, the better your approval chances are (with all else being equal).
Why it is a Problem for You
Even if you were to be approved for a zero down auto loan, it is still not in your best interest to skip the down payment if you have less than perfect credit. Why?
A down payment works in your favor in the short-term and in the long-run. The reasons they benefit you are numerous (and important):
- It could be the difference between approval and denial - Lenders calculate the loan to value (LTV) of a potential loan. A down payment helps you reduce the LTV and improve your chances of being approved.
- It reduces the amount of money you need to borrow - A reduced loan principal will lower the monthly payment amount and result in lower interest charges.
- It makes shortening the loan term possible - When you finance less, you can reduce the financing term to save big on interest charges over the life of the loan. Even if you make the loan term a year or two shorter and it keeps your monthly payments up, it could end up saving you thousands in interest expenses.
- It reduces negative equity - Cars are depreciating assets that lose value over time. If you don't make a down payment (or only make a small one), you will usually end up owing more money on your loan than the vehicle is worth . This means you have negative equity or are upside down, which can lead to a lot of problems if your car is stolen, totaled or needs to be traded in.
In many cases, not having a down payment is going to be a problem for the lender and it's going to be a problem for you. When making a big purchase like a car, it's best to prepare ahead of time and save up some money to put down.
Financing for All Situations
Auto Credit Express has been helping people with damaged credit find auto financing for over two decades. We have helped all kinds of people in all kinds of credit and financial situations. Even if you have little to no money to put down at this time, it is possible that our dealers can assist you.
Our service is free and it only takes a few minutes to apply. Find out what we can do for you by filling out our secure online application. We'll get to work for you right after you click submit.
And just as lenders often need a down payment, they also require your next vehicle to be fully insured. Click here to shop auto insurance and find the policy and provider that works for you.