Do I Need a Down Payment When Applying For Auto Loans With Bad Credit
While it may be painful to come up with a decent down payment the cold hard truth is that if your credit is bad you will more than likely have to come up with a sizable one. Most sub prime lenders will want to see at least 10 to 20 percent down or more when considering car loans for bad credit. This may seem like a lot of money but there are a couple of reasons outlined below as to why a lender will require this when applying for auto loans with bad credit.
1) Loan to value- Auto loans are secured loans that are secured by collateral in this case a vehicle. Sub prime lenders have strict loan to value guidelines they will follow when considering approving a loan. These guidelines are set up to help them make sure they do not lend out more money than the collateral is worth. Most of these lenders will use the NADA or Blue Book as a guide to determine the value of a vehicle. If your credit score is low you represent a higher risk to the bank so they will limit how much they will lend you as a percentage of the NADA or Blue Book value of the particular vehicle you are looking to purchase. By doing this they minimize their risk. If for some reason you default on the loan and they have to repossess the vehicle they will have collateral in their possession that is worth more than the outstanding loan. They can then sell that vehicle at auction and apply the proceeds to the outstanding balance. Here is a very general example; if you are looking at a vehicle for $10000.00 and the NADA trade in value is $8000.00 it would make it much harder for the lender to decline your application if you were putting $3000.00 down because the loan you would need would be for $7000.00. Much less than the value of the collateral. Well within their loan to value guidelines.
2) Cash Down Demonstrates Commitment From Borrower- When someone comes to the table with large down payment it makes it a lot harder for a lender to say no. If a person scrimped and saved for six months or a year to gather the down payment for a new car the chances of them defaulting on the loan decrease. If they were to default on the loan not only would they lose the car they would also lose all the money they put down. People generally will not walk away from a loan that they put a lot of money down on. By having a sizeable down payment your are demonstrating to the bank that yes your credit is damaged but the circumstances that caused this are behind you and you are willing to make a commitment to paying back this loan by putting a large chunk of money down upfront to minimize the lenders risk.
This author has over 20 years of automotive finance experience, specializing in auto loans with bad credit. You can visit http://www.autoloanswithbadcreditnow.com for other useful tips and resources. Maybe you are looking for auto loan rates, refinancing auto loans, car loans for bad credit, or looking for tips on raising your credit score. This site will help you.