If you don’t have great credit, you might find yourself looking at a subprime car loan. While it’s true these loans have higher interest rates, there are ways to keep your payment down where you want it.
One of the best ways is to make a large down payment. The more money you put down on the home, the more you can spend on a car. If you are in a real bind, you can keep the cost of the car down and put a decent amount of money down to keep your payment as low as possible.
Just how much money do you need for a down payment?
10% is a Good Benchmark
Each lender will require a different down payment amount, but on average, you can expect to need a 10% down payment. On a $20,000 car, that means $2,000. This is the bare minimum down payment, though. Of course, the more money you can invest in the car, the better your chances of loan approval become. Lenders use the car as collateral, so they know they can repossess the car should you stop making payments, but they don’t like to take risks. They want to know beyond a reasonable doubt that you will be able to make the payments. They don’t want your car.
A Higher Down Payment Gives you Better Terms
Because we are talking subprime car loans here, you know you will be facing higher costs and/or interest rates. You can lower these costs by making a larger down payment, though. Generally, lenders start getting more flexible when you put at least 20% down on the car. On the same $20,000 car, that means a $4,000 down payment.
Your down payment doesn’t have to be strictly cash, though. You can use a trade-in as your deposit as well. In the perfect world, though, you would make a cash deposit or make a combination of a trade-in and cash deposit. A trade-in is valuable, but it’s not liquid. The dealer has to turn the car into cash by selling it, which can take some time. The dealer does knock the purchase price of the car down by the value of the trade-in, but cash is what gives the lenders leverage.
Making the Right Choice
Deciding what size down payment is right for you requires you to look at your financial situation. Determine which car payment you can afford the best. Make sure you have plenty of wiggle room in your budget, though. In other words, don’t accept a car payment that takes up all of your excess cash. You need disposable income to cover the daily cost of living. Plus, you need room to put money aside should you need help making your car payment in the future.
You don’t want to deplete your savings just to make a down payment on a car, but you want to give enough of a payment that the lender will approve your subprime loan without giving you an interest rate that will make you panic. There is a fine balance that you need to find and that you can find by talking honestly with the dealer and any potential lenders.