One of the things that makes car buying difficult for many is the down payment. It’s recommended that buyers put down 20% of the purchase price up front whether you’re buying new or used. In some cases, it is possible to purchase a car without a down payment, but in many, at least some amount down will be required.
Why should you have a down payment? There are a few reasons.
- Loan approval. You have a better chance of getting your loan approved for the rest if you put money down, especially if you have bad credit. The more you put down, the less you need to borrow. This lowers the risk to the financial institution. Also, you have more “skin in the game” and lenders feel that the more you’ve put toward the car, the better the chance you’ll continue to make payments.
- Savings. You’ll save money two ways when you put money down. First, you’ll pay less interest over time because you’re borrowing less. This means that when all is said and done, the car will cost you less. You also may qualify for a lower interest rate if you put more money down. Finally, your monthly payments will be lower when your down payment is higher.
- Equity. Equity is simply the value of the car less the amount you owe. A $10,000 car with a $9,000 loan means you only have $1,000 equity. If you need to sell it or refinance it, you won’t have enough equity to do so. Because cars lose value quickly, or depreciate, it could lose value faster than you can pay it off. If it drops to $9,000 in value but you still have $8,500 to pay off, you’ll be down to only $500 equity, even when you’ve been making payments. You always want to owe less than the value of the car, and the wider you can make that gap, the more valuable the car becomes.
Making a down payment isn’t easy. If you can do it, you’re wise to make as big a down payment as you can. For those with bad credit, this can make all the difference and increase your purchasing options. However, if you find that you don’t have much to put down and your credit score is low, all hope is not lost.
If you’re ready for a new car but your credit is keeping you from getting approved, CreditYes can help with our bad credit auto loan program! We can match you with a dealership in your area that will be with you every step of the way. Our service is fast and free. Fill out our secure online application and get behind the wheel of your next car today!