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Deposit: Car Finance Jargon Busters

Do you need to pay a deposit when getting a car finance deal? 🤔 Wonder what it entails? Many car finance companies offer zero deposit deals to car buyers who want to drive home a new car without having to spend any cash. But why do some car finance experts suggest paying a large car finance deposit? If you want the chance to be offered a loan with a lower interest rate and also make the monthly repayments on your loan more affordable, then it’s wise to consider paying a substantial deposit when financing a car.

PCP and HP Car Finance Deals

A car finance deal makes buying a new car more affordable because instead of paying a huge sum of money for a single purchase, you get to spread the cost of the vehicle into a set number of months. You don’t have to worry about spending all your savings on a car because you only have to think about the amount you have to repay the car finance company every month. 

With a Personal Contract Purchase, the cost of the car is divided into three parts: your initial deposit, your monthly repayments, and finally, an optional final payment known as a balloon payment at the end of your contract when you decide to own the car. If you don’t want to pay the balloon payment, then you also have the option to return the vehicle and walk away. You won’t have to pay anything else as long as the car is still in good condition and you haven’t exceeded the mileage limit stated on your contract. The effect of having the balloon payment means your monthly repayments will be more affordable. 

In the case of a Hire Purchase car finance agreement, the price of the car is also split into instalments which you need to pay every month. You usually have to pay an initial deposit and then pay off the loan each month until your contract ends. By the time you’ve reached the end of the contract term, you will be the owner of the vehicle. Unlike Personal Contract Purchase deals, there are no balloon payments for Hire Purchase agreements. However, expect the monthly repayment amount to be higher.

Why Pay a Car Finance Deposit?

The deposit you pay for a car finance deal is the initial lump sum to get your agreement started. You have the freedom to decide how much you want to pay as your deposit, however, if you’re looking to get a high-end vehicle, then those usually need a larger deposit so that the monthly payments won’t be too costly. 

As mentioned earlier, there are zero deposit deals that car finance companies offer. However, this kind of deal is typically available to borrowers who have excellent credit scores and strong credit histories. A zero deposit car finance deal may seem like a good idea but it’s important to check the interest rate that comes with it because it’s usually higher than if you pay a deposit for the car since you’re borrowing more money. Many car buyers opt to pay a big deposit to lower their monthly repayments.

Benefits of Paying a Deposit 

Lower Interest Rate

A major benefit of paying a substantial amount for your car finance deposit is you get to enjoy a lower interest rate. Since you will be borrowing less money, the lender sees you as a low-risk borrower. 

The bigger your deposit, the more likely you’d be offered a lower interest rate on your car finance deal. With this perk, the amount you’ll repay the lender would be considerably lower. This makes your monthly repayments on the car more affordable and manageable. 

Own the Car Sooner

With a big deposit, you will have lower monthly repayments, and you can make these even lower if you choose a longer loan term (although of course you will pay more interest overall over a longer term.) You may choose a shorter loan term, as this reduces the overall interest you pay, but this would mean the amount you have to pay every month would be higher. Nonetheless, the great thing about going this route is you will be able to finish the loan faster and own the car sooner. 

Increase Your Chances of Getting a Loan

If you have a poor credit score or if you have a county court judgment recorded on your credit report, you can increase your chances of getting approved on your car finance application if you can pay a big deposit. While this isn’t a guarantee, it’s a good move so you can demonstrate to the lender that you can afford to put down cash for a new car. 

Apart from paying a deposit, you may also want to take other steps to improve your chances of getting a loan by providing proof of income, bank statements, and other documents that can show that you are financially stable to take out a loan for a car. Also, it would be wise to pay back any current loans you have to help boost your credit score. 

How Much Should I Pay as Deposit?

In hire purchase deals, it makes sense to pay a large deposit but how much exactly should you set aside for it? Actually, there’s no fixed amount that you need to pay as a deposit. Some lenders require at least a 10% deposit based on the price of the car you want to buy but you can pay more if you like. But don't forget it's wise to ensure you still have some savings put aside for a rainy day!

Before putting a big chunk of your cash on the car finance deposit, see to it that you still have enough money to have a comfortable lifestyle. You’d want to be able to put down a good amount for your deposit whilst still having enough funds for your usual expenses, monthly repayments and also some money for other car-related expenses.

Takeaway

Buying a car is a big decision which involves a huge sum of money. Before making the purchase, make sure that you’re prepared for the financial responsibilities of financing a car, and that you can comfortable afford the monthly outgoings it involves. A substantial deposit is a good idea though, because it lowers your monthly repayments over the period of the loan. However, be sure you have enough funds left for taxes, insurance, breakdown covers, and other expenses that come with owning a vehicle. If you're wondering how much the finance repayments are likely to be, do check out our Carmoola car finance online calculator to get you started. 👍

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