With numerous costs and fees involved with a car loan, you may be wondering whether you need a deposit, and how much that deposit should be.
What is the reason for paying a deposit?
A deposit works as a down payment on your car loan in which you agree to pay a portion of the purchase price upfront, which then reduces the overall amount of the loan left to pay off.
Another reason for a deposit is that it demonstrates you can save, which can be viewed favourably by lenders and banks. A deposit can reduce the risk for lenders which may result in you being rewarded with more competitive interest rates on your car loan.
With car loans, it is not always necessary to have a deposit. Some lenders may require a deposit, while some will approve a loan without one, which will involve you borrowing the full value of the vehicle. Some cases in which a lender may require you to pay a deposit include, if you have a bad credit rating, if you owe money on an existing car loan, or if the lender has specific policies regarding deposits.
When you apply for a car loan, the lender will assess your income, debts and expenses to determine how a car loan will fit into your budget as you need to be able to afford your loan repayments.
Do you need a deposit?
Many lenders and banks may offer a loan for the entire value of the vehicle, so it is not always required to save up a deposit, and it can be up to you whether or not you have one. When speaking with a finance specialist about your car loan, ask whether you need a deposit for your specific loan.
If you do require a deposit for your car loan, the deposit amount can depend on how much you can afford or the requirements set by the lender.
A deposit for a car loan may commonly be between 10-20 per cent. A 20 per cent deposit can be a good amount to aim for, however, any amount can have an impact on lowering your repayment and interest costs. A 20 per cent deposit may also not be realistic for many people, especially if you need a new vehicle sooner rather than later.
If you decide to pay a deposit and it’s not required, the larger the deposit amount the less you’ll pay overall. If you have a bad credit rating, a bigger deposit may also increase your chances of getting your loan approved, and getting a better rate.
While a deposit is often not mandatory, it can help with the loan approval process and provide more breathing room when it comes to your repayments. There are numerous benefits of paying a deposit on your car loan.
Advantages of a deposit
A key advantage of having a deposit is that it will help make your repayments more manageable by lowering the amount. The bigger your deposit the smaller your loan as you will have less to pay off. This can also mean you pay less in interest overall and may enable you to get a shorter loan term.
Having a deposit saved may increase your chances of approval, as it can make you seem more appealing to lenders. They may view your ability to save a deposit as evidence that you’re more likely you’ll be able to pay your loan back. Having a deposit may also give you access to a lower interest rate on your loan, which can save you a lot of money in the long term.
If you have time to save up a deposit, it can be extremely advantageous, but if you need a car as soon as possible, there are still options with lenders who don’t require a deposit.
Deciding whether to pay a deposit, may come down to your financial situation, but while saving up for a deposit can take time, and may not always be necessary for a car loan, it may help you save a significant amount of money on your loan.