People that have bad credit sometimes ask if money down will help their chances in getting approved for a car loan. When sub-prime lenders review an application for an auto loan, they asses risk. Anything that will lower their risk factor will increase your chances of getting an auto loan. Long job time, a long time at your current address, low debt ratio’s, and a good equity position in the loan that you’re applying for are all things that can help you get approved. When I worked at a dealership, I would tell customers that they can get just about any car they want with the right amount of money down. Sometimes lenders will only approve your loan if you have a very good equity position. This may means that you need to finance less than what the car is worth. Money Down

Let’s say a dealer buys a car at auction. The car has a value of $10,000. They only pay $8,000 but by the time they ship it, fix it, and clean it they own the car for $9,500. They will certainly need to make a profit so let just assume that profit is $500. That means that they need to get no less than $10,000 for the car. Now, since you will need to pay taxes, let’s assume that is $600. Now they need to get a minimum $10,600. We can further complicate this by assuming that since you are a high-risk borrower, the lender will asses a fee to the dealer to allow your loan. This fee will vary but let’s assume the fee is 10%. If they have the car listed at $11,600 and the lender will give you 100% of the value in the loan, you will need $1,600 down in order to drive away with that car. Since risk varies from person to person, and car to car, the fee can vary a lot.

Since more money down will lower risk for the bank, you may be able to get better finance rates and terms if you put more money down. Let’s compare two loans. Let’s say you take the $10,000 car from above and put the minimum of $1,600 down and your loan starts at 100% of is value. The lender offers you 20% interest for 5 years. Your payment will be about $265 a month. In another scenario, you put $2,500 down and the lender offers you 15% interest because of the better equity position and lower risk for the bank. Now you are only financing 91% of the value. You pay less interest, of course, your payment is lower by almost $50 a month, you save over $2,000, not including the $900 you put down, and you have a better equity position in case you decide to trade the car off before the loan is done. Why would anyone try to buy a car with less money than they have available for a down payment?

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If you have bad credit and need a car loan but don’t have any money available for a down payment you may be wondering if you’ll qualify for a car loan. First, you need to establish a timeline. Did your car break down today and you need to get to work 50 miles away? Then you need a car pronto. If not, you may have a little time. Even if you have perfect credit, it is a good idea to put as much money down as possible on your car loan. This will end up saving you up to thousands of dollars in interest charges over the life of your loan. Don’t think it’s just a bad credit thing, it’s a smart thing. If you’ve got some time, start figuring out how much you can save by the time you need a car. Are you going to replace a car because it has a ton of miles on it? That’s a good reason, and cars, being mechanical, will inevitably break down eventually.

You should start saving money immediately, save money until you have 20% or more to use as a down payment. If your car breaks down early, don’t fix the car just try to get your car at that point. There is almost never a situation in which you will get your money back out of a car repair upon trade in. Now if you can’t wait to get a car and you don’t have any money to put down, you should try to get a car that is going to work best for the lending programs. Remember, even if you get a good deal on a car you are still adding in your tax, title, license, and fees into the loan. This may not be possible in many cases especially if your credit is really rough. Just ask the finance manager what cars will work with little or no money down and they can get things going in the right direction.

New Start Auto Loans is here to help match you to a dealer program in your area. We do not offer you a loan directly, we do however take steps to make sure that when you apply, your application gets into the hands of finance managers that have experience in many various types of bad credit auto finance situations. Whether you have bad credit, no credit, are trying to buy a car after or during a bankruptcy or foreclosure rest assured that New Start Auto Loans will match you to a finance manager in your area that can assist you with your auto loan.

Bad credit really is a broad term.  Bad credit is a descriptive term that refers to less than perfect credit but bad credit really is in the eye of the beholder.  Credit may be bad to some and okay to others depending on who’s asking.  If you have been extended any type of credit in the past and been unable to pay on the required terms you may have bad credit;  But it’s not that simple.  First of all, there are a thousand and one variables. Your credit history is a compilation of credit that has been extended to you if the form of credit cards, auto loans, home loans, and personal loans over time.  Most of your credit only shows up in your credit file for seven years from when it was reported.  If an institution or creditor does not report to any of the three main credit bureaus it probably won’t show up on your credit at all.  Some derogatory items on your credit that are usually not considered “credit” until they show up because they are very past due and in collections.  These can include utility bills, phone bills, cable bills, hospital bills, and even fines can show up on your credit.  One interesting thing to note is that you may have a dozen hospital bills that show past due, but if you’ve made all of your car payments on time it will be easier to get a car loan. I once talked to a lender who said “I don’t care how they paid their cable bill I just want to know that they are going to make their car payment.”

Here’s another thing to consider. There are three main credit bureaus, TransUnion ™, Equifax ™, and Experian ™. They will all have slightly different information reported on them and sometimes very different scores as you may already know.  Did you know however, that your credit score will vary depending on what type of credit you are applying for?  If you apply for a credit card you may have a 625 TansUnion ™ score but when you apply for an auto loan your TransUnion ™ score is 601. This is because the credit bureau tries to determine how likely you are to pay on the required terms of each different scenario. You may have had a credit card that average payments were $80 a month and paid every payment on time but when it came time to make your $407 a month car payment you were late a few times. The biggest determining factor in determining whether or not you get a loan is not so much your score but your “credit history”.

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Bad credit really is a broad term.  Bad credit is in the eye of the beholder but generally means credit history that has blemishes or is less than perfect.  There are almost an endless amount of credit score cards, lenders, financing options, and reasons credit will need to be looked at so it’s important to determine what is the curve on which your credit will be graded.  If you are applying for an auto loan and your dealer sends you to a bank that only approves 800 fico scores and above, you must have very good credit to get approved; anything below a 720 score could be considered “bad credit”.

For the purpose of an auto loan, I will set the bar for you.  If you have a credit score below 660, have late payments on your car, home loan, or installment loans in your history, or if your debt ratio to available balance is higher than 50%, you could be considered “bad credit” and should consider a program that works with people who have bad credit to secure your next auto loan.

A high risk auto loan is a loan given to someone that has bad credit, no credit, an unstable work history, low income, trying to get a loan for much more than the value of the car, or other situations that would make the loan riskier than a standard loan.  Unlike conventional lenders, banks that make high risk auto loans look for a way to get you approved, not for a way to turn you down.  At the same time, because these banks loan to people with bad credit, the interest rate can be higher than a conventional loan. Just remember that if you pay this loan on time, chances are the interest on your next loan will be lower.

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