Why the Down Payment is Crucial on a Bad Credit Car Loan

January 27th, 2016 by

A down payment on a car is your ticket for easier payments during the term of your loan; and it’s even more important when it comes to bad credit car loans. Therefore, it’s crucial to put down the right amount. Regardless of bad credit or good credit, a down payment will help greatly. I understand it might be hard to make a bigger down payment if you are looking for financing with bad credit, but it’s important to put down one that’s higher than average; especially since that average is so low.

Then again, buying a car isn’t and overnight process. Therefore, you should have a little time to tuck some extra cash away for a bigger down payment.

What is it?

The down payment is quite simply the amount of money you can put down on the car before financing. For example; this means if you put $5,200 down on a $26,000 car, you’ve reduced the price of the car by 20 percent. Now, instead of getting a loan of $26,000 for the car, you only need one to cover $20,800. Generally speaking, it reduces the amount of the loan required for the car you want to purchase.

If you have bad credit, chances are you won’t be going after a $26,000 car. But, the principal is still the same.

Why is it Important?

First and foremost, it shows financial responsibility. If you walk into a bad credit car dealership with a fat wad of cash ready to slap down on a car, the dealer is more likely to give you financing. It shows you are financially responsible enough to save up the money for the down payment; which means chances are you’re responsible enough to pay off the loan they give you.

Secondly, it allows you to offset the higher interest rate. For bad credit consumers, interest rates on a car loan can be anywhere between 14-20 percent depending on your state. Therefore, it’s important to pay off as much of the car as possible before getting a loan with that type of interest rate. It will make paying off the loan much more manageable in the long-run, because now there is a much smaller total to pay off.

Finally, it allows you to have a shorter loan term. Long-term loans are the bane of consumers with good credit, and extremely detrimental for those with bad credit. Typically, you don’t want a loan to go for longer than 60 months. A bigger down payment can prevent that from happening. This is because the high interest rate tacked on will make paying off your car loan a costly endeavor.

Putting down the largest amount of money possible is a good way to not only reduce your loan-term, but also the amount paid overtime.

How Much Should I Put Down?

Put down as much as you can afford. I’m not saying you need to pay off half the car now and the other half overtime, but 20-25 percent seemed to be the recommended amount long ago. In 2015, the recommended amount is only 10.4 percent; which is what’s causing the average loan to last more than 68 months.

Which is why I said earlier it’s crucial to put down more than the average consumer, especially if you have bad credit. On a loan that long with bad credit, the interest rate will end up costing more than the car. Also, if you want to upgrade to a new car after your credit has improved, but you haven’t finished paying off your previous loan yet, it will carry over.