When you’re considering buying a car, you’ll be dealing with more than just your monthly payment. Another important aspect of car buying is your down payment. A down payment is paid at the start of your loan, helping to cover a portion of the cost and potentially lower your monthly payments. But when you have poor credit, putting forth a down payment can be intimidating. Thankfully, you can still afford a down payment on a car even if your credit is less than perfect.
Typical Down Payment Amounts
First, it’s important to understand how much you’d typically be expected to put down on a car. In many situations, the standard down payment for a new car is at least 20%. For a used car, on the other hand, the typical expectation is 10% down for fair credit.
Not every lender requires that their buyers make a down payment. But most will, especially if you have fair to poor credit. Making a strong down payment can help lower the interest rate you are approved at, lower your monthly payments throughout the term of the loan, and could even make you more likely to get approved for an auto loan in the first place.
Where Does My Down Payment Go?
Once you provide a down payment, what happens to that money? Your down payment goes straight to the principal price of the vehicle, and the remaining balance is your total amount financed. Essentially the amount the bank is lending you.
Let’s say that you purchase a used car for $10,000 and opt for a five-year repayment schedule. (For the sake of simplicity, we’ll leave interest out in this example.) With no down payment, you’ll be left paying approximately $170 each month for 60 months.
On the other hand, let’s say you buy the same car but put down the suggested down payment of 10%. At the beginning of your loan, you’ll put down $1,000, meaning you still owe $9,000 on your car. Then, over the next 60 months, you’ll only need to pay $150 per month.
This example is simplistic as it does not factor in interest, but it helps explain why offering a down payment can be helpful in the long run. As a general rule, you can expect to drop your monthly payment by $20 for every $1,000 you put down on your car. This figure isn’t always the case, but it’s a good rule of thumb.
Negative Equity
In addition to decreasing your monthly payment, placing a down payment on a car can also help offset any depreciation your new vehicle might incur. On top of your car loan itself, you may also encounter other fees and taxes. If you don’t put a down payment on your car when you buy it, then you’ll actually wind up owing more than the car is worth, once you add in these additional fees. This occasion is referred to as “negative equity.” Think of equity as ownership.
Negative equity can become an issue when you eventually decide to sell your car. A future car buyer will probably only pay whatever price falls within the fair market value of your vehicle. If you’ve got negative equity because you didn’t make a down payment, the amount that you make from your car sale will likely not even cover the total balance on your loan, meaning you won’t be able to break even. However, making even a small down payment can help you avoid this situation altogether.
Making a Down Payment with Bad Credit
If you have bad credit, be prepared to make a down payment. Plain and simple. Perhaps you’re not able to cover the whole down payment amount at signing, but there are ways this can be split up or deferred with certain lenders. You can still make a down payment and reap the benefits, even if it’s not the full suggested amount.
In general, it’s suggested to put down at least 10% of the car’s sale price or $1,000 with fair credit, and 15%-20% when your credit is poor. Even if your down payment is small, it can still help your potential lender see that you’re serious about your purchase (almost like an act of good faith).
If you’re attempting to qualify for a subprime auto loan, you may be asked to put down a larger down payment. It will always be in your benefit. Speak with your lender about any potential payment arrangements for your loan or to learn about any specific down payment requirements that they may have.
Will a Co-signer Help Lower My Down Payment?
Having a co-signer can also help you get approved without a strong down payment. It just depends on the individual’s credit and income. If they have a high FICO (600+) and make at least $3000 a month, then this will have a positive impact and should lower the down payment needed, even if your credit needs some work. Lenders will likely view your application more positively if you have another signer since the lender will have a lower likelihood of having to repossess the car because of missed payments.
Working with FA Financing
Putting a down payment on a car is only one thing to consider when looking for a loan. If you’re not sure where to begin, consider working with FA Financing. We have more than 20 years of experience helping those with bad credit get approved for auto loans in San Diego County. Whether you’ve had multiple past car loans, multiple repossessions, a recent bankruptcy, or any other event that has lowered your credit score, we can help. FA Financing helps present your loan application in the best light for lenders, highlighting your strengths and ensuring that you’re a good candidate for the loan. Plus, we work to get you the best terms possible, so you can afford a trustworthy car and work to build your credit score at the same time. Contact FA Financing today to learn more and get started finding an auto loan!
