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The Importance of Having a Down Payment

Not all car buyers have money saved up for a down payment. However, if you have credit issues and are in need of a vehicle, it is likely that the lender will want you to have one. Plus, there are additional benefits of one, so the importance of having a down payment cannot be understated.

When you are financing a car, a down payment is good for both the buyer and the lender. For buyers, it allows them to build equity in the car quicker, and for the lender, it shows them that the borrower is willing to make a financial commitment to repaying the loan. If you are a car buyer with damaged credit, the down payment improves your chances of having your loan application approved by the lender.

How Much Do I Need?

The subprime industry standard for a down payment is 10 per cent of the vehicle's purchase price or $1,000, whichever is less. This is usually enough to satisfy the down payment requirements of most subprime lenders. But keep in mind that the down payment doesn't always need to be in cash. If your current vehicle has any available trade equity, it can be used towards the purchase of your next car.

Why Do Lenders Require a Down Payment?

Importance of Having a Down Payment

As I mentioned earlier, a down payment shows the lender that you have a financial stake in the vehicle. Without a down payment, a lender stands to lose more money during the first couple years of a loan - when the loan to value ratio (LTV) of the car is highest - if the borrower defaults on the payments. Lenders have noticed a connection between borrowers with a strong down payment and their ability to successfully complete a car loan.

Additional Benefits of a Down Payment

There are some other ways a down payment will help you.

Greater possibility of a shorter loan term
When you reduce the amount of money you are borrowing, it may be possible for you to finance the vehicle for a shorter loan term, which will allow you to save money on interest charges.

Lowers the amount of negative equity

No matter what, a car will lose value over time. A down payment can reduce the effects of depreciation and your chances of being "underwater" on the loan in the event that the vehicle is totaled or stolen, or you need to trade it in before the loan is paid off.

It seals the deal
A down payment can be one thing that determines whether or not a subprime lender will approve you for the loan.

On the Road Again

At Canada Auto Loan, we connect car buyers who have credit issues with auto dealers that work with experts in subprime auto lending. We have a countrywide network of car dealers that will do everything possible to get you approved and back on the road. Complete the easy, fast and secure online application - it's free and there is no obligation. From there, we will match you with a dealer in your local area who is best able to help. Start today.