When you are buying a car, almost all dealers and financers will require that you provide a down payment. A down payment can help you pay your loan off faster, but it does not technically offset a less than perfect credit score. Your lender will still need to check your credit report and credit score no matter how much you put down.
How Much of a Down Payment Do I Need?
No matter your credit situation, a lender will require either 10% of the vehicle purchase price or $1,000 as a minimum down payment. However, this can vary from lender to lender. If you do not have the money needed for a down payment, it can be hard to get approved for a loan with bad credit.
Although most subprime lenders only require 10% or $1,000 for a down payment, experts agree that you will be better off with a larger down payment. By providing a larger down payment up front, you will make less overall payments on the loan. When you make fewer payments, you will spend a considerable amount less on interest as well.
A Large Down Payment
If you have the cash and are considering placing a down payment of more than 20%, your chances of approval could increase. A down payment will show a lender that you are “invested” into the loan and are thus more likely to repay it. With a large down payment, the loan to value ratio will decrease respectively.
A larger down payment can be a plus for lenders because the value of the loan will be low compared to the value of the car. The lender knows that if you miss multiple payments, they can still repossess your car and possibly even resell it for a profit.
For example, if you buy a car for $15,000 and place a $7,000 down payment, the lender will need to finance $8,000 on a vehicle that is worth $15,000. If they need to repossess the asset, the lender could sell the car at auction for $15,000 even though they technically only paid $8,000. This can be viewed as a win-win situation for both the lender and the buyer since you will save on interest and payments.
It is important to know that a lender will have other requirements besides a down payment and a credit check. Often times, subprime lenders require that buyers produce income statements, residency history, and even references in some cases.
If you are looking to buy a new car but are in need of financing, CrediReady can help. Our nationwide network of trusted dealers and verified lenders work with buyers in all credit situations. Take a moment to fill out our free no-obligation loan inquiry form and start shopping for your dream car today!