Do You Need a Deposit for a Car Loan?
Find out about the potential benefits of a car loan deposit and if you need one with loans.com.au.
A car deposit, also known as a down payment, is a portion of the car finance you pay upfront. The amount you spend on your down payment will be deducted from your car loan’s principal amount.
Because a down payment isn’t mandatory for car loans, a lot of borrowers wonder if they should even put down a deposit. Both choices offer benefits and drawbacks. The key is finding the option that is best for your situation.
When to consider putting down a car deposit?
A car loan deposit may be a good idea if you can comfortably afford it. The rule of thumb is that the bigger the deposit, the less you must pay back on a car loan and the more you can save down the line.
In some cases, not giving a down payment makes more sense. For example, if you don’t have time to save up for a sizable deposit, foregoing it altogether could be more beneficial to get you into a new car sooner.
Lenders don’t usually ask for a deposit for car loan applications. This means you can borrow the full price of the vehicle without paying for the lender’s insurance, unlike when you apply for a mortgage. Although there are plenty of advantages to putting down a deposit, the benefits may not be worth it depending on your situation.
What are the benefits of a car loan deposit?
Paying a car loan deposit offers plenty of great benefits, from saving money to making repayments more manageable. Here are some advantages of paying a deposit on your car loan:
Save on interest
You’re borrowing less money from the lender when you put down a deposit. By decreasing the principal amount owed, you could reduce the interest you need to pay over the life of the loan. This could give you considerable savings in the long run.
This all depends on how much you put towards the car loan deposit. If you put down a big deposit, you owe less and will have lower repayments, and vice versa.
It can make your repayments more manageable
By increasing your deposit, you’re borrowing less money, which means there’s less ‘principal’ to pay off. Less interest being charged means your minimum repayments will be smaller, potentially freeing up money for other expenses or allowing you to pay off the loan faster by paying above the minimum.
Own your car sooner and get more equity
By minimising the principal loan owed, you could opt for a shorter car loan term, as the repayments will be more manageable, so that you can own your car much sooner. Cars depreciate quickly; paying off your car loan sooner rather than later can help you maximise its value. This can also help you avoid negative equity on your car finance, which is when the outstanding balance on your loan is bigger than the car’s value.
Improve chances of approval
Borrowers who offer sizable car loan deposits are typically viewed more favourably by lenders. When you provide a significant down payment, lenders are more likely to see it as a sign that you have sufficient savings and are in good financial standing. This not only improves your chances of getting a car loan, but because lenders view you as less of a risk, they could offer better terms and interest rates.
What are the drawbacks to providing a car loan deposit?
There are some disadvantages to providing a car loan deposit. However, these drawbacks are usually due to the financial and time constraints it puts on the borrower. Here are some of the downsides of putting down a car loan deposit:
Saving takes time
If you need a car immediately, you may not have enough time to save for a deposit. Although there are plenty of benefits when you put down a car deposit, it may not be the right choice when you’re in urgent need of a new vehicle.
It’s also generally not advisable to spend your emergency funds on a car deposit, as it could leave you in a vulnerable position. Since car loans don’t require a deposit, opting to borrow the full price of the vehicle may be a better option for certain situations.
Ties up your funds
You’ll have less cash on hand when you pay for a car loan deposit. Even if you pay a 10% deposit, that’s still a substantial amount that could be put towards your savings, bills, debt payments, and investments instead.
How much are car loan deposits?
A 10% deposit is generally the standard when it comes to car loans, and it can significantly reduce your interest paid and repayments. The larger the deposit, the less you’ll pay overall, which is particularly important for a car as it’s a depreciating asset.
If you can’t afford a 10% deposit, any amount can make a difference in your overall car loan costs. To see what your car loan repayments will look like with varying deposit amounts, use our online car loan calculator. This tool can help you estimate your car loan repayments and understand the total costs.
When figuring out your car loan repayments, note that some loan features can affect the cost of your loan. A balloon payment could impact your potential repayments and how much you’d need to pay for your car each month.
Should I put down a car loan deposit?
It all depends on where you’re at financially and how urgently you need a new car. For those with enough savings and who can comfortably put down a deposit, it may be worth it. The potential savings and the opportunity to own your car sooner are certainly great benefits.
On the other hand, if you’re in immediate need of a car and don’t have the time or resources to save, waiting until you have enough for a deposit may not be worth it. When thinking about car loan deposits, think about your financial situation and see if it makes sense for you.
If you’re ready to step into the car market, you need to first work out what you can afford to borrow. Using our car loan borrowing power calculator, you can get an idea of how much you can borrow on a car loan.
Find your ideal car loan at loans.com.au
Ready to start car buying? Before you run to the showrooms and car buying sites, you may need to get your car finance taken care of. At loans.com.au, we have a range of car loan options for you to choose from. From no deposit car loans to car loan refinance, we have a finance solution that fits your situation. Get to know more about our competitive rate car loans by calling 13 10 90 or apply online today!
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your personal circumstances before making any financial decisions.
Find out in under 2 minutes if you qualify for one of our car loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
