A down payment has two major benefits when you’re buying a car: it can increase your chances of getting approved for financing and it can save you money during loan repayment. But how much should you expect to put down if you have bad credit?
When you might need to make a down payment
If you have excellent credit you probably won’t be required to make a down payment. If your credit score is less than 620 you may be asked by a lender to put some money down before they will approve you for a car loan.
However, this depends on where you seek financing. Banks usually have stricter rules than in-house financiers and many dealerships can waive the down payment requirement if you have enough income to make your loan payments.
Why lenders ask for money down
To a lender, customers with lower credit scores are seen as riskier borrowers than those with a high score. A down payment requirement is one way for a lender to recoup some of their losses if a borrower can’t keep up with payments.
Keep in mind that a down payment will make your application more attractive to a lender.
Factors affecting how much you put down
So, how big should your down payment be? That depends on the following four factors:
1. The price of the vehicle
Some dealerships have minimum down payment requirements for customers with bad credit.
This is usually 10% to 20% of the price of the vehicle you’re buying. If the vehicle is $13,000 a 10% down payment would be $1,300 and 20% would be $2,600. Raise the purchase price of the car to $23,000 and your down payment will be $2,300 or $4,600, respectively.
2. How much you have saved
Your finances will dictate how much you can afford to spend on a down payment. If you have bad credit and nothing saved up, you might have to postpone buying a new car until you can save enough money to make a down payment.
Make a budget of your income and expenses and set a realistic monthly saving target. Stay on track with automatic savings transfers.
3. Trade-in value of your existing vehicle
If you’re shopping for a new vehicle to replace an old one, ask your dealership about a trade-in. This way you won’t have to sell your old car yourself and you can put the money towards the down payment on a new one.
It’s a real win-win. Depending on the value of your trade-in you might not have to put anything down or you can significantly reduce your down payment.
4. Whether you’re buying new or used
New cars can lose as much as 10% of their value when they’re driven off the lot. Because of this quick depreciation, car dealers usually require a larger down payment for new cars than they do for used cars. Putting more money down helps you avoid having negative equity on your car loan, which means you owe more than the car is actually worth.
Used cars depreciate a lot slower than new cars, so down payments usually only need to be in the 10% range.
How a down payment can save you money
Paying for a portion of the vehicle upfront means borrowing less to cover the cost of the purchase. The smaller the car loan the lower the monthly payments and the less you’ll spend on interest.
For example, if you finance a $15,000 car for 48 months at a 10% interest rate, you’ll end up spending $3,652.39 in interest over the course of the loan. Make a 10% down payment and you’ll save $326.14 in interest during the same term.
Down payments are beneficial, even if they aren’t required
If you have bad credit you might need to make a down payment before you can get approved for a car loan. This can range from 10% to 20% depending on the lender. But, a down payment is a good idea even if it’s not mandatory because it lowers the amount you need to borrow and saves you money on interest. If you have some cash set aside, make a down payment.
Birchwood Credit Solutions doesn’t require a down payment from any of our customers, even if you have bad credit. Fill out our online application today or visit one of our three Winnipeg locations.